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How Often Should You Monitor Your Checking Account?

Many people find that monitoring their checking account once or twice a week is a good cadence, but there’s no frequency that’s right or wrong. It’s a personal decision: Your checking account is likely to be the hub of your financial life, and so you may want to peek at your balance often or see what transactions have been conducted. At a minimum, it is recommended that individuals check their account monthly.

Here, learn more about this important financial topic, including:

•   How often should you typically monitor your checking account?

•   How often should you balance your checking account?

•   What are the benefits of monitoring your bank accounts?

•   How do you monitor your accounts?

How Often Should You Check Your Bank Statement and Bank Account?

There is no exact science when it comes to how often you should monitor your checking account. How often you should check your bank account is a very personal decision.

At the very bare minimum, it can be important to check it at least once per month to look for signs of fraud and fees that were charged to the account, as well as to see how your money is being spent. Doing so can be an important part of better money management.

However, for most people, once per month is not enough. One benchmark study found that 36% of Americans check their bank account every day, while 30% check it once a week.

Should You Check Your Bank Account Every Day?

There are many reasons why you might want to monitor your bank activity as often as once per day. Doing so can help you take control of your finances in such situations as:

•   You have a tight budget and worry about your balance slipping too low when you pay bills.

•   You are a freelancer and want to see if a paycheck you deposited has cleared.

•   Your debit card is lost, and you’re worried it fell into the wrong hands and someone is swiping away with it.

•   If there was a data breach of some kind? While usually the answer to “Are checking accounts safe?” can be yes, there can be issues. It may be a wise move to check your balance every day if you think you’ve been phished, scammed, or hacked. In this case, watching your account like a hawk in this situation can help you detect bank account fraud and report it.

However, for others, the answer to “How often should you check your bank account?” will be less frequent, perhaps weekly.

What Should You Monitor When You Have a Bank Account?

When you have a bank account, it’s wise to regularly check the following:

•   Your balance. Is it getting lower than you’d like?

•   Account alerts. Is anything flagged as needing your attention?

•   Transaction history. Are there any unauthorized or erroneous charges?

•   Fees and charges. Are you aware of what charges you may be incurring?

•   Spending trends. Has your occasional sushi lunch has become an almost daily debit card expense?

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The Benefits: Why You Should Monitor Your Checking Account

Whether you decide that the right cadence for checking your bank account is daily, weekly, or another frequency, here are some of the rewards of keeping tabs on your checking.

Spot Hidden Fees

By regularly checking your bank account, you can keep an eye on fees you may be paying. Some financial institutions are notorious for charging hidden and/or excessive fees.

You might be surprised to see such charges as monthly account fees, ATM charges, overdraft and NSF fees, and more. You might want to dispute charges that you feel should not have been assessed.

Or, if you see that these fees are eating away at your cash, you might want to switch to a new bank.

Monitor for Fraud or Scams

Unfortunately, hackers and scams are part of life. Even with protective measures in place, it is possible for your account to be compromised. By checking your account regularly, you can keep an eye on any suspicious activity, such as an automatic withdrawal you don’t recognize or a debit card charge that isn’t yours.

The sooner you spot such issues, the faster you can deal with them. This can help you be liable for no or lower losses.

•   You are only responsible for up to $50 if you notify your bank within two business days of unauthorized charges with your debit card.

•   That figure rises to $500 if you notify your bank after two days but before 60 days after the bank statement showing the unauthorized transactions was issued.

•   If you take longer than 60 days to notify your bank, you could be liable for the full amount drawn on your account.

Stay on Track with Your Budget

Here’s why tracking your expenses and balancing your checking account can be important: These actions can help you follow your budget. For instance, if you’ve created a line-item budget and have been successfully sticking to it, you may still encounter an unexpected expense, such as a big dental bill or pricey car repair.

By knowing where your bank balance stands, you can determine if you can afford to pay that bill from checking or whether this counts as a good reason for when to use your emergency fund.

How to Monitor Your Accounts

Thankfully, banks generally offer a variety of ways to keep tabs when managing your checking account.

•   You can use your bank’s website or app to click your way to your account details.

•   Another digital option is to use a third-party app or website, where account holders can connect all of their accounts and see a comprehensive display of their money.

•   Some financial institutions will offer banking alerts for checking accounts. For instance, if your bank account is low or goes into overdraft or there’s suspected fraud, you might receive a text message, email, and/or push notification as an alert. This can help you keep in touch with where your account stands.

•   You can often check your balance at an ATM.

•   If you bank with a traditional vs. online bank, you can go into a branch in person. You could ask a teller for help viewing your balance.

•   Banks may also offer services via phone, where customers can call in and request their balance.

When to Get in Touch With the Bank

When your monitor your bank account, you may encounter a few key times when it’s important to get in touch with your bank:

•   If you see a fraudulent charge on your account, contact the bank as soon as possible. Many banks offer 24/7 customer assistance so customers can get in touch any time of day.

•   If you are charged fees for an overdraft or a bounced check, contact your bank. You might be able to get those fees reversed. A bank may only do this in the first or second instance or take a part of the fee off, but it’s better than nothing.

•   Another reason to call a bank is to see if there are any promotions available. Customers might be able to open a new high-yield checking account, receive a bonus, or lower their monthly fees. Banks may be willing to give customers perks so that they can retain their business.

Recommended: What Does a Pending Transaction Mean?

The Takeaway

Regularly checking your bank accounts is a vital part of keeping your finances on track. The exact frequency with which you look at your accounts is a personal decision, but what’s important is that you stay on top of your checking account.

Consider setting a calendar alert or reminder if you are having trouble remembering to review your accounts. Many people find that checking their account daily or once or twice a week is the right cadence.

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


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FAQ

Does it hurt to have too many checking accounts?

There may be times when you’d want to open up more than one checking account to keep, say, your income from your full-time job and your side hustle separate or to cover different kinds of expenses. However, you will likely need to keep an eye on all of your accounts and could potentially have to pay account fees and meet balance requirements for each.

What should you monitor when you have a checking account?

It can be important to monitor your checking account for a low balance or overdraft, for errors, for hidden fees, and for unauthorized transactions and other signs of fraudulent activity.

Do banks look at your checking account?

Banks may look at your accounts for a variety of reasons such as monitoring for fraud, gathering information on what services customers might need, and determining credit eligibility (say, if you have applied for a home loan).


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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

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

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

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

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

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


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

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This article is not intended to be legal advice. Please consult an attorney for advice.

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What Is a Salary Reduction Contribution Plan?

What Is a Salary Reduction Contribution Plan?

A salary reduction contribution plan allows employees to reduce their taxable income by investing for retirement. With this type of plan, an employee’s salary isn’t really reduced; rather the employer deducts a percentage of their salary and deposits the funds in a retirement savings plan where the money can grow tax deferred.

Common employer-sponsored retirement plans include 401(k)s, 403(b)s, and SIMPLE IRAs. Employee contributions — also called elective deferral contributions — are typically made with pre-tax money, effectively reducing the participant’s taxable income and often lowering their tax bill. Some plans feature an after-tax Roth contribution option, too.

You may already be contributing to a salary reduction contribution plan, although your company may not call it that. These plans can be a valuable way to boost your retirement savings, and offer you a tax break. Here’s what you need to know.

Salary Reduction Contribution Plans Explained

A salary reduction contribution plan helps workers save and invest for retirement through their employer via several types of retirement accounts. Money is typically deposited in a retirement account such as a 401(k), 403(b), or SIMPLE IRA on a pre-tax basis through recurring deferrals (aka contributions) on behalf of the employee.

Employees typically select the percentage they wish to deposit, e.g. 3%, 10%, or more. That percentage is deducted from an employee’s paycheck automatically, and deposited in their retirement account. Sometimes a specific dollar amount is established as the salary reduction contribution amount.

The upshot for the worker is that they can delay paying taxes on the amount of the salary reduction for many years, until they withdraw money from the account during retirement. Like a traditional 401(k) or 403(b), these accounts can be tax deferred; Roth options are considered after tax (because you deposit after-tax funds, but pay no tax on withdrawals). Retirement contributions may offer decades of compounded investment returns without taxation. Essentially, retirement contributions through an employer’s plan means saving money from your salary.

There are also SIMPLE IRA salary reduction agreements sometimes offered by small businesses with 100 or fewer employees: “SIMPLE” is short for “Savings Incentive Match Plan for Employees.”

A Salary Reduction Simplified Employee Pension Plan (SARSEP), on the other hand, is a simplified employee pension plan established before 1997.


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How Salary Reduction Contribution Plans Work

Salary reduction contribution plans are established between a worker and their employer. The two parties agree to have a set percentage or a dollar amount taken from the employee’s salary and deposited into a tax-advantaged retirement plan. That money can then be invested in stock or bond mutual funds, or other investments offered by the plan.

With pre-tax contributions, the employee has a reduced paycheck but gets current-year tax savings. With after-tax contributions, as in a Roth account, taxes are paid today while the account can potentially grow tax-free through retirement; withdrawals from a Roth account are tax free.

Example of a Salary Reduction Contribution Plan

Here’s an example of how a salary reduction contribution plan agreement might work:

Let’s say an employee at a university has a $100,000 salary and wishes to save 10% of their pay in a pre-tax retirement account. The school has a 403(b) plan in place. The worker contacts their Human Resources department to ask about submitting a salary reduction agreement form. On the form, the worker chooses an amount of their salary to defer into the 403(b) plan (10%).

Typically they also select investments from a lineup of mutual funds or exchange-traded funds (ETFs).

Come payday, the employee’s paycheck will look different. If the usual biweekly gross earnings amount is $3,846 ($100,000 salary divided by 26 pay periods, per year), then $384.60, or 10% of earnings, is deducted from the employee’s paycheck and deposited into the 403(b) and invested, assuming the employee has selected their desired investment options.

Depending on other deductions, the employee’s new taxable income might be $3,461.40. The contribution effectively reduced the worker’s salary, potentially lowering their tax bill at the end of the year.

If the worker is in the 22% marginal income tax bracket, the $10,000 annual deferral amounts to an annual federal income tax savings of $2,200 per year.

Bear in mind that withdrawals from the 403(b) plan are taxable with pre-tax salary reductions. We’ll look at salary reduction plan withdrawal rules later.

Pros & Cons of Salary Reduction Contribution Plans

Although your employer may offer a salary reduction contribution plan like a 401(k) or SIMPLE IRA salary reduction agreement for retirement, it’s not required to participate. Before deciding whether you want to join your organization’s plan, here are some advantages and disadvantages to consider.

Pros

A salary reduction contribution offers employees the chance to reduce their current-year taxable income. A lower salary defers taxation on the money you save, until retirement. For young workers, that could mean decades of compounding returns without having to pay taxes along the way.

For those who have the option of choosing a Roth account, taxes are paid in the current year, but withdrawals are tax free (as long as certain criteria are met). Also, contributions to a Roth 401(k) or Roth 403(b) plan can grow tax-free through retirement.

What’s more, the employer might offer their own contribution such as a matching contribution. Typically, an employer might match employees’ contributions up to a certain amount: e.g. they’ll match 50 cents for every dollar an employee saves, up to 6% of their salary.

Another upside is that lowering one’s salary through automated savings can help an individual live on less money and avoid spending beyond their means — which may help establish long-term savings habits. Thus, contributing to a salary reduction plan can be a step toward creating a financial plan.

Cons

Like many aspects of personal finance, salary reduction contributions can be a balancing act between meeting your obligations today and providing for your future self.

Saving for the future can mean forgoing some pleasure in the present, similar to the concept of delayed gratification. Maybe you decide to postpone a vacation or purchase of a new car in exchange for a more robust retirement account balance.

Employees should also weigh the likelihood of needing money in the event of an emergency. Taking early withdrawals or borrowing from your 401(k) account can be costly, or may come with penalties, versus having extra cash in a checking or savings account. In most cases if you take out a loan from an employer-sponsored plan, you would have to repay the loan in full if you left your job.


💡 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.

Salary Reduction Contribution Limits

Annual salary reduction contribution limits can change each year. The Internal Revenue Service (IRS) determines the yearly maximum contribution amount. For 2024, the most a worker can contribute to a 401(k) or 403(b) is $23,000. For those age 50 and older, an additional $7,500 contribution is permitted.

In 2023, a worker can contribute up to $22,500 to a 401(k) or 403(b), and those 50 and older can contribute an additional $7,500 in catch-up contributions.

A SIMPLE IRA salary reduction agreement has different limits. For 2024, a SIMPLE IRA’s annual maximum contribution is $16,000 with a catch-up contribution of up to $3,500 for those age 50 and older. For 2023, the annual maximum SIMPLE IRA contribution limit is $15,500 and $3,500 for those 50 and up.

Salary Reduction Contribution Plan Withdrawal Rules

There are many rules regarding salary reduction contribution plan withdrawals.

At a high level, when an employee withdraws money from a tax-deferred retirement account, they will owe income tax on the money. If you withdraw money before age 59 ½, a 10% early-withdrawal tax might be applied.

There can be some exceptions to these rules, but it’s best to consult with a professional.

Should you withdraw money when you leave your employer? While taking a lump sum is possible under those circumstances, it may not be your best choice: You’d owe taxes on the full amount, and you’d risk spending money that’s meant to support you when you’re older.

The standard rule of thumb is that individuals who are leaving one employer should consider rolling over their retirement account to an IRA, or their new employer’s plan. In that case there are no penalties or taxes owed, and the money is once again secured for the future.

The Takeaway

Salary reduction contribution plans can help workers save money for retirement on a pre-tax or after-tax basis. Steadily putting money to work for your future is a major step toward building a solid long-term financial plan. And in many cases you will reap a tax advantage in the present — or in the future.

That said, there are important pros and cons to weigh when deciding whether you should contribute via a salary reduction plan. You may have another strategy. But if you don’t, you might want to consider opting into your employer’s plan for the benefits it can provide.

An important point to know: Even when you join a salary reduction plan, you can still open up an IRA to boost your savings. And if you leave your job, you can roll over your salary reduction retirement account to an IRA without paying taxes or penalties.

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

Easily manage your retirement savings with a SoFi IRA.

FAQ

Does a 401(k) reduce salary?

Not really. Contributions toward a traditional 401(k) retirement plan are a tax-deductible form of savings that effectively reduce an individual’s taxable income. In that regard, making retirement contributions on a pre-tax basis can reduce someone’s salary (but you still have the money in your retirement account).

Also, some plans allow for after-tax contributions which also reduce the size of your paycheck, but are not tax deductible.

What does employee salary reduction mean?

Employee salary reduction means that money is automatically deducted from an employee’s paycheck and contributed to a retirement plan. Money moves into a plan such as a 401(k), 403(b), or a SIMPLE IRA. The account is in the employee’s name, and they decide how to invest the funds.

What is the difference between SEP and SARSEP?

A SEP is known as a Simplified Employee Pension Plan. A SEP plan allows employers to contribute to traditional IRAs (called SEP IRAs) for their employees. The IRS states that a business of any size, even self-employed, can establish a SEP. These plans are common in the small business world.

A SARSEP, on the other hand, is a simplified employee pension plan established before 1997. A SARSEP includes a salary reduction arrangement. The employee can choose to have the employer contribute a portion of their salary to an IRA or annuity. Per the IRS, a SARSEP may not be established after 1996.


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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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How Soon Can You Refinance Student Loans?

Typically, student loan borrowers cannot refinance their debt until they graduate or withdraw from school. At that point, federal student loans and the majority of private student loans have a grace period, so it can make sense to refinance right before the grace period ends.

Depending on your financial situation, the goal of refinancing may be to snag a lower interest rate and/or have lower monthly payments. Doing so can alleviate some of the stress you may feel when repaying your debt. In this guide, you’ll learn when you can refinance and what options are available, plus the potential benefits and downsides of each.

What Do Your Current Loans Look Like?

Before deciding whether or not to refinance your student loans, you need to know where your loans currently stand. Look at the loan servicers, loan amounts, interest rates, and terms for all loans before making a decision.

Contact Info for Most Federal Student Loans

The government assigns your loan to a loan servicer after it is paid out. To find your loan servicer, visit your account dashboard on studentaid.gov, find the “My Aid” section, and choose “View loan servicer details.” You can also call the Federal Student Aid Information Center at 800-433-3243.

Loans Not Owned by the Department of Education

Here’s how to get in touch:

•   If you have Federal Family Education Loan Program loans that are not held by the government, contact your servicer for details. Look for the most recent communication from the entity sending you bills.

•   If you have a Federal Perkins Loan that is not owned by the Education Department, contact the school where you received the loan for details. Your school may be the servicer for your loan.

•   If you have Health Education Assistance Loan Program loans and need to find your loan servicer, look for the most recent communication from the entity sending you bills.

Private Student Loans

Private student loans are not given by the government, but rather banks, credit unions, and online lenders. You’ll need to find your specific lender or servicer in order to find out your loan information.

Can You Refinance Student Loans While Still in School?

You may be able to refinance your student loans while still in school with certain lenders, but doing so may not make the most sense for your situation.

If you’re worried about interest accruing on your unsubsidized federal loans and/or private student loans while in school, you can most certainly make interest-only payments on them in order to keep the interest from capitalizing.

One important note: With federal student loans, any payments you make while still in school or during the grace period will not count as a qualifying payment toward loan forgiveness, if you plan on using that.


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

Which Loans Can Be Refinanced While Enrolled?

You can refinance any type of student loan while enrolled in school, assuming that the lender allows it. If you’re still in school and want to refinance, a lender will want to make sure you have a job or job offer on the table, are possibly in your last year of school, and have a solid credit profile. You could also consider refinancing your student loans with a cosigner if you do not meet the lender’s requirements on your own.

A couple of important points if you are considering refinancing federal student loans with a private lender:

•   Doing so means you will forfeit federal benefits and protections, such as forbearance and forgiveness, among others.

•   If you refinance for an extended term, you may have a lower monthly payment but pay more interest over the life of the loan. This may or may not suit your financial needs and goals, so consider your options carefully.

Which Loans Can’t Be Refinanced While Enrolled?

If you find a lender willing to refinance your student loans while still in school, they most likely won’t exclude a certain type of loan. However, it is best not to refinance federal student loans while enrolled. Federal Subsidized Loans, for example, do not start earning interest until after the grace period is over. Since you aren’t paying anything in interest, it doesn’t make sense to refinance and have to start paying interest on your loans immediately.

If you plan on using federal benefits, such as income-driven repayment plans or student loan forgiveness, refinancing student loans could be a bad idea. Refinancing gives you a new loan with a new private lender, thereby forfeiting your eligibility to federal benefits and protections, as noted above.

Is It Worth Refinancing Only Some of Your Loans?

Yes, it can be worth refinancing only some of your loans. The student loans you may want to focus on refinancing may include ones that have a variable rate (and you prefer a fixed rate), ones with a relatively high interest rate, or ones where you’ve had a less-than-ideal relationship with the servicer and are looking for a new experience.

When you might want to think twice about refinancing:

•   If you have federal loans and plan on using an income-based repayment plan, for example, it makes sense not to include those loans in the refinance.

•   If you have a low, fixed interest rate currently, you should probably keep those loans as is. The main reason to refinance is to secure a lower interest rate or a lower payment. Keep in mind, though, that by lowering your payment, you typically are extending your term. This can mean that you end up paying more in interest over the life of the loan.

Pros and Cons of Refinancing Student Loans

Pros Cons

•   Possibly lower your monthly payment

•   Possibly lower your interest rate

•   Shorten or lengthen the loan term

•   Switch from variable to fixed interest rate, or vice versa

•   Combine multiple loans into one

•   Lose access to federal benefits and protections

•   Lose access to remaining grace periods

•   May be difficult to qualify

•   May end up paying more in interest if you lengthen the term

Examples of Refinancing Before Earning a Degree

As stated above, there are some lenders that may allow you to refinance before you graduate or withdraw from school. These lenders may currently include Citizens Bank, Discover, RISLA, and Earnest.

Graduate students are also eligible to refinance their undergraduate student loans, assuming they meet the lender’s requirements or use a cosigner. Parents with Parent PLUS Loans are also typically allowed to refinance their loans prior to their child graduating. Rules will vary by lender, so make sure to do your research and choose a lender that will work with your unique situation.


💡 Quick Tip: Federal parent PLUS loans might be a good candidate for refinancing to a lower rate.

Alternatives to Refinancing

If refinancing your student loans isn’t the right option for you, there are alternatives to refinancing you can explore.

•   The main alternative is student loan consolidation, which combines your federal student loans into one loan with one monthly payment. The main difference between consolidation and refinancing is the interest rate on a federal loan consolidation is the weighted average of the rates of the loans you are consolidating, rounded up to the nearest one-eighth of a percentage.

•   You typically won’t save on interest, but you can lower your monthly payment by extending the loan term. Doing this, however, means you’ll probably pay more in interest over the life of the loan.

•   Student loan refinancing refers to paying off current loans with a new loan from a private lender, preferably with a lower rate. This rate is not the weighted average of the loans, but rather is based on current market rates, your credit profile, and your debt-to-income ratio.

•   Other alternatives to refinancing include making interest-only payments while still enrolled in school or requesting a student loan forbearance if you’re struggling to make your payments. Forbearance means you can reduce or pause payments for a designated period of time.

You’ll want to know all your student loan repayment options — and the pros and cons of consolidating or refinancing your loans, prior to making a decision.

A calculator tool for student loan refinancing can come in handy when estimating savings, both monthly and over the life of your loan.

Weighing Perks and Interest Rates

Before deciding whether refinancing is right for you, it’s important to again highlight this important point: If you refinance your federal student loans with a private lender, those loans will no longer be eligible for programs like income-driven repayment plans, federal forbearance, and Public Service Loan Forgiveness.

But if you can get a lower interest rate, refinancing may be a good fit. Most refinancing lenders offer loan terms of five to 20 years. Shortening or elongating your loan term can affect your monthly payment and the total cost over the life of your loan.

For some borrowers, lengthening the term and lowering the monthly payment will be a valuable option, even though it can mean paying more interest over the life of the loan. Only you can decide if this kind of refinancing makes sense for your personal finances.

The Takeaway

When can you refinance student loans? As soon as you establish a financial foundation or bring a solid cosigner aboard. Can you refinance your student loans while in school? Yes, however, not all lenders offer this and it may not make sense for your situation. It’s also important to understand the implications of refinancing federal student loans with a private lender. If you do not plan on using federal benefits and protections and are comfortable with the possibility of paying more interest over the loan’s term, it might be a move worth considering.

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.


SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


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

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 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.

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403(b) vs Roth IRA: Key Differences and How to Choose

What’s the Difference Between a 403(b) and a Roth IRA?

A 403(b) and a Roth IRA account are both tax-advantaged retirement plans, but they are quite different — especially regarding the amount you can contribute annually, and the tax implications for each.

Generally speaking, a 403(b) allows you to save more, and your taxable income is reduced by the amount you contribute to the plan (potentially lowering your tax bill). A Roth IRA has much lower contribution limits, but because you’re saving after-tax money, it grows tax free — and you don’t pay taxes on the withdrawals.

In some cases, you may not need to choose between a Roth IRA vs. a 403(b) — the best choice may be to contribute to both types of accounts. In order to decide, it’s important to consider how these accounts are structured and what the rules are for each.

Comparing How a 403(b) and a Roth IRA Work

When it comes to a 403(b) vs Roth IRA, the two are very different.

A 403(b) account is quite similar to a 401(k), as both are tax-deferred types of retirement plans and have similar contribution limits. A Roth IRA, though, follows a very different set of rules.

403(b) Overview

Similar to a 401(k), a 403(b) retirement plan is a tax-deferred account sponsored by an individual’s employer. An individual may contribute a portion of their salary and also receive matching contributions from their employer.

An employee’s contributions are deducted — this is known as a salary reduction contribution and deposited in the 403(b) pre-tax, where they grow tax-free, until retirement (which is why these accounts are called “tax deferred”). Individuals then withdraw the funds, and pay ordinary income tax at their current rate.

Although 403(b) accounts share some features with 401(k)s, there are some distinctions.

Eligibility

The main difference between 403(b) and 401(k) accounts is that 401(k)s are offered by for-profit businesses and 403(b)s are only available to employees of:

•   Public schools, including public colleges and universities

•   hurches or associations of churches

•   Tax-exempt 501(c)(3) charitable organizations

Early Withdrawals

Typically, individuals face a 10% penalty if they withdraw their money before age 59 ½. Exceptions apply in some circumstances. Be sure to consult with your plan sponsor about the rules.

Contribution Limits and Rules

There are also some different contribution rules for 403(b) accounts. The cap for a 403(b) is the same as it is for a 401(k): $23,000 in 2024 and $22,500 in 2023. And if you’re 50 or older you can also make an additional catch-up contribution of up to $7,500 in 2024 and 2023.

In the case of a 403(b), though, if it’s permitted by the 403(b) plan, participants with at least 15 years of service with their employer can make another catch-up contribution above the annual limit, as long as it’s the lesser of the following options:

•   $15,000, reduced by the amount of employee contributions made in prior years because of this rule

•   $5,000, times the number of years of service, minus the employee’s total contributions from previous years

•   $3,000

The wrinkle here is that if you’re over 50, and you have at least 15 years of service, you must do the 15-year catch-up contribution first, before you can take advantage of the 50-plus catch-up contribution of up to $7,500.

Roth IRA Overview

Roth IRAs are different from tax-deferred accounts like 403(b)s, 401(k)s, and other types of retirement accounts. With all types of Roth accounts — including a Roth 401(k) and a Roth 403(b) — you contribute after-tax money. And when you withdraw the money in retirement, it’s tax free.

Eligibility

Unlike employer-sponsored retirement plans, Roth IRAs fall under the IRS category of “Individual Retirement Arrangements,” and thus are set up and managed by the individual. Thus, anyone with earned income can open a Roth IRA through a bank, brokerage, or other financial institution that offers them.

Contribution Limits and Rules

Your ability to contribute to a Roth, however, is limited by your income level.

•   For 2024, if you’re married filing jointly, you can contribute the maximum to a Roth if your modified adjusted gross income (MAGI) is less than $230,000. If your income is between $230,000 and $240,000 you can contribute a reduced amount.

•   For single filers in 2024, your income must be less than $146,000 to contribute the maximum to a Roth, with reduced contributions up to $161,000.

•   For 2023, if you’re married filing jointly, you can contribute the maximum to a Roth if your modified adjusted gross income (MAGI) is less than $218,000. If your income is between $218,000 and $228,000 you can contribute a reduced amount.

•   For single filers in 2023, your income must be less than $138,000 to contribute the maximum to a Roth, with reduced contributions up to $153,000.

Is your retirement piggy bank feeling light?

Start saving today with a Roth or Traditional IRA.


Roth 403(b) vs Roth IRA: Are They the Same?

No. A Roth 403(b) does adhere to the familiar Roth structure — the individual makes after-tax contributions, and withdraws their money tax free in retirement — but otherwise these accounts are similar to regular 403(b)s.

•   The annual contribution limits are the same: $23,000 with a catch-up contribution of $7,500 for those 50 and older for 2024; $22,500 with a catch-up contribution of $7,500 for those 50 and older for 2023.

•   There are no income limits for Roth 403(b) accounts.

Also, a Roth 403(b) is like a Roth 401(k) in that both these accounts are subject to required minimum distribution rules (RMDs), whereas a regular Roth IRA does not have RMDs.

One possible workaround: You may be able to rollover a Roth 403(b)/401(k) to a Roth IRA — similar to the process of rolling over a regular 401(k) to a traditional IRA when you leave your job or retire.

That way, your nest egg wouldn’t be subject to 401(k) RMD rules.

Finally, another similarity between Roth 403(b) and 401(k) accounts: Even though the money you deposit is after tax, any employer matching contributions are not; they’re typically made on a pre-tax basis. So, you must pay taxes on those matching contributions and earnings when taking retirement withdrawals. (It sounds like a headache, but your employer deposits those contributions in a separate account, so it’s relatively straightforward to know which withdrawals are tax free and which require you to pay taxes.)


💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Which Is Better, a 403(b) or Roth IRA?

It’s not a matter of which is “better” — as discussed above, the accounts are quite different. Deciding which one to use, or whether to combine both as part of your plan, boils down to your tax and withdrawal strategies for your retirement.

To make an informed decision about which retirement plan is right for you, it can be helpful to conduct a side-by-side comparison of both plans. This chart breaks down some of the main differences, giving you a better understanding of these types of retirement plans, so that you can weigh the pros and cons of a Roth IRA vs. 403(b).

403(b)

Roth IRA

Who can participate? Employees of the following types of organizations:

•   Public school systems, if involved in day-to-day operations

•   Public schools operated by Indian tribal governments

•   Cooperative hospitals and

•   Civilian employees of the Uniformed Services University of the Health Sciences

•   Certain ministers and chaplains

•   Tax-exempt charities established under IRC Section 501(c)(3)

Individuals earning less than the following amounts:

•   Single filers earning less than $146,000 for 2024 (those earning $146,000 or more but less than $161,000 may contribute a reduced amount)

•   Married joint filers earning less than $230,000 for 2024 (those earning $230,000 or more but less than $240,000 may contribute a reduced amount)

•   Single filers earning less than $138,000 for 2023 (those earning $138,000 or more but less than $153,000 may contribute a reduced amount)

•   Married joint filers earning less than $218,000 for 2023 (those earning $218,000 or more but less than $228,000 may contribute a reduced amount)

Are contributions tax deductible? Yes No
Are qualified distributions taxed? Yes No (if not qualified, distribution may be taxable in part)
Annual individual contribution limit $23,000 for 2024 (plus catch-up contributions of $7,500 for those 50 and older)

$22,500 for 2023 (plus catch-up contributions up to $7,500 for those age 50 and older)

$7,000 for 2024 (individuals 50 and older may contribute $8,000)

$6,500 for 2023 (individuals 50 and older may contribute $7,500)

Are early withdrawals allowed? Depends on individual plan terms and may be subject to a 10% penalty Yes, though account earnings may be subject to a 10% penalty if funds are withdrawn before account owner is 59 ½
Plan administered by Employer The individual’s chosen financial institution
Investment options Employee chooses based on investments available through the plan Up to the individual, though certain types of investments (collectibles, life insurance) are prohibited
Fees Varies depending on plan terms and investments Varies depending on financial institution and investments
Portability As with other employee-sponsored plans, individual must roll their account into another fund or cash out when switching employers Yes
Subject to RMD rules Yes No

Pros and Cons of a 403(b) and a Roth IRA

There are positives to both a 403(b) and a Roth IRA — and because it’s possible for qualified individuals to open a Roth IRA and a 403(b), some people may decide that their best strategy is to use both. Here’s a side-by-side comparison of a 403(b) vs. a Roth IRA:

403(b)

Roth IRA

Pros

•   Contributions are automatically deducted from your paycheck

•   Earning less during retirement may mean an individual pays less in taxes

•   Employer may offer matching contributions

•   Higher annual contribution limit than a Roth IRA

•   More investment options to choose from

•   Withdrawal of contributions are not taxed; withdrawal of earnings are not taxed under certain conditions and/or after age 59 ½

•   Account belongs to the owner

Cons

•   May have limited investment options

•   May charge high fees

•   There may be a 10% penalty on funds withdrawn before age 59 ½

•   Has an income limit

•   Maximum contribution amount is low

•   Contributions aren’t tax deductible

Pros of 403(b)

•   Contributions are automatically deducted by an employer from the individual’s paycheck, which can make it easier to save.

•   If an individual earns less money annually in retirement than during their working years, deferring taxes may mean they ultimately pay less in taxes.

•   Some employers offer matching contributions, meaning for every dollar an employee contributes, the employer may match some or all of it, up to a certain percentage.

•   Higher annual contribution limit than a Roth IRA.

Pros of Roth IRAs

•   Individuals can invest with any financial institution and thus will likely have many more investment options when opening up their Roth IRA.

•   Withdrawal of contributions are not taxed; withdrawal of earnings are not taxed under certain conditions and/or after age 59 ½.

•   Account belongs to the owner and is not affected if the individual changes jobs.

There are also some disadvantages to both types of accounts, however.


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

Cons of 403(b)s

•   There are limited investment options with 403(b)s.

•   Some 403(b) plans charge high fees.

•   Individuals typically pay a 10% penalty on funds withdrawn before age 59 ½. However, there may be some exceptions under the rule of 55 for retirement.

Cons of Roth IRAs

•   There’s an income limit to a Roth IRA, as discussed above.

•   The maximum contribution amount is fairly low.

•   Contributions are not tax deductible.

Choosing Between a Roth IRA and 403(b)

When considering whether to fund a 403(b) account or a Roth IRA, there’s no right choice, per se — the correct answer boils down to which approach works for you. You might prefer the automatic payroll deductions, the ability to save more, and, if it applies, the employer match of a 403(b).

Or you might gravitate toward the more independent setup of your own Roth IRA, where you have a wider array of investment options and greater flexibility around withdrawals (Roth contributions can be withdrawn at any time, although earnings can’t).

Or it might come down to your tax strategy: It may be more important for you to save in a 403(b), and reduce your taxable income in the present. Conversely, you may want to contribute to a Roth IRA, despite the lower contribution limit, because withdrawals are tax free in retirement.

Really, though, it’s possible to have the best of both worlds by investing in both types of accounts, as long as you don’t exceed the annual contribution limits.

Investing With SoFi

Because 403(b)s and Roth IRAs are complementary in some ways (one being tax-deferred, the other not), it’s possible to fund both a 403(b) and a Roth IRA.

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

Easily manage your retirement savings with a SoFi IRA.

FAQ

Which is better: a 403(b) or a Roth IRA?

Neither plan is necessarily better. A 403(b) and a Roth IRA are very different types of accounts. A 403(b) has automatic payroll deductions, the possibility of an employer match, and your contributions are tax deductible. A Roth IRA gives you more control, a greater choice of investment options, and the ability to withdraw contributions (but not earnings) now, plus tax free withdrawals in retirement. It can actually be beneficial to have both types of accounts, as long as you don’t exceed the annual contribution limits.

Should you open a Roth IRA if you have a 403(b)?

You can open a Roth IRA if you have a 403(b). In fact it may make sense to have both, since each plan has different advantages. You may get an employer match with a 403(b), for instance, and your contributions are tax deductible. A Roth IRA gives you more investment options to choose from and tax-free withdrawals in retirement. In the end, it really depends on your personal financial situation and preference. Be sure to weigh all the pros and cons of each plan.

When should you convert your 403(b) to a Roth IRA?

If you are leaving your job or you’re at least 59 ½ years old, you may want to convert your 403(b) to a Roth IRA to avoid taking the required minimum distributions (RMDs) that come with pre-tax plans starting at age 73. However, because you are moving pre-tax dollars to a post-tax account, you’ll be required to pay taxes on the money. Speak to a financial advisor to determine whether converting to a Roth IRA makes sense for you and ways you may be able to minimize your tax bill.


SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

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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What Is a Non-Deductible IRA?

What Is a Non-Deductible IRA?

A non-deductible IRA is an IRA, or IRA contributions, that cannot be deducted from your income. While contributions to a traditional IRA are tax-deductible, non-deductible IRA contributions offer no immediate tax break.

In both cases, though, contributions grow tax free over time — and in the case of a non-deductible IRA, you wouldn’t owe taxes on the withdrawals in retirement.

Why would you open a non-deductible IRA? If you meet certain criteria, such as your income is too high to allow you to contribute to a traditional IRA or Roth IRA, a non-deductible IRA might help you increase your retirement savings.

It helps to understand how non-deductible contributions work, what the rules and restrictions are, as well as the potential advantages and drawbacks.

Who Is Eligible for a Non-Deductible IRA?

Several factors determine whether an individual is ineligible for a traditional IRA, and therefore if their contributions could fund a non-deductible IRA. These include an individual’s income level, tax-filing status, and access to employer-sponsored retirement plans (even if the individual or their spouse don’t participate in such a plan).

If you and your spouse do not have an employer plan like a 401(k) at work, there are no restrictions on fully funding a regular, aka deductible, IRA. You can contribute up to $7,000 in 2024; $8,000 if you’re 50 and older. In 2023, you can contribute up to $6,500; $7,500 if you’re 50 or older. And those contributions are tax deductible.

However, if you’re eligible to participate in an employer-sponsored plan, or if your spouse is, then the amount you can contribute to a deductible IRA phases out — in other words, the amount you can deduct gets smaller — based on your income:

•   For single filers/head of household: the 2024 contribution amount is reduced if you earn more than $77,000 and less than $87,000. Above $87,000 you can only contribute to a non-deductible IRA. (For 2023, the phaseout begins when you earn more than $73,000 and less than $83,000. If you earn more than $83,000, you can’t contribute to a traditional IRA.)

•   For married, filing jointly:

◦   If you have access to a workplace plan, the phaseout for 2024 is when you earn more than $123,00 and less than $143,000. (For 2023, the phaseout is when you earn more than $116,000, but less than $136,000.)

◦   If your spouse has access to a workplace plan, the 2024 phaseout is when you earn more than $230,000 and less than $240,000. (For 2023, the phaseout is when you earn more than $218,000 but less than $228,000.)



💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Non-Deductible IRA Withdrawal Rules

The other big difference between an ordinary, deductible IRA and a non-deductible IRA is how withdrawals are taxed after age 59 ½. (IRA withdrawals prior to that may be subject to an early withdrawal penalty.)

•   Regular (deductible) IRA: Contributions are made pre-tax. Withdrawals after 59 ½ are taxed at the individual’s ordinary income rate.

•   Non-deductible IRA: Contributions are after tax (meaning you’ve already paid tax on the money). Withdrawals are therefore not taxed, because the IRS can’t tax you twice.

To make sure of this, you must report non-deductible IRA contributions on your tax return, and you use Form 8606 to do so. Form 8606 officially documents that some or all of the money in your IRA has already been taxed and is therefore non-deductible. Later on, when you take distributions, a portion of those withdrawals will not be subject to income tax.

If you have one single non-deductible IRA, then the process is similar to a Roth IRA. You deposit money you’ve paid taxes on, and your withdrawals are tax free.

It gets more complicated when you mix both types of contributions — deductible and non-deductible — in a single IRA account.

Here’s an example of different IRA withdrawal rules:

Let’s say you qualified to make deductible IRA contributions for 10 years, and now you have $50,000 in a regular IRA account. Then, your situation changed — perhaps your income increased — and now only 50% of the money you deposit is deductible; the other half is non-deductible.

You contribute another $50,000 in the next 10 years, but only $25,000 is deductible; $25,000 is non-deductible. You diligently record the different types of contributions using Form 8606, so the IRS knows what’s what.

When you’re ready to retire, the total balance in the IRA is $100,000, but only $25,000 of that was non-deductible (meaning, you already paid tax on it). So when you withdraw money in retirement, you’ll owe taxes on three-quarters of that money, but you won’t owe taxes on one quarter.

Contribution Limits and RMDs

There are limits on the amount that you can contribute to an IRA each year, and deductible and non-deductible IRA account contributions have the same contribution caps. People under 50 years old can contribute up to $7,000 for 2024, and those over 50 can contribute $8,000 per year. People under 50 years old can contribute up to $6,500 for 2023, and those over 50 can contribute $7,500 per year.

IRA account owners are required to start taking required minimum distributions (RMDs), similar to a 401(k), from their account once they turn 73 years old. Prior to that, account holders can take money out of their account between ages 59 ½ and 73 without any early withdrawal penalty.

Individuals can continue to contribute to their IRA at any age as long as they still meet the requirements.

Benefits and Risks of Non-Deductible IRA

While there are benefits to putting money into a non-deductible IRA, there are some risks that individuals should be aware of as well.

Benefits

There are several reasons you might choose to open a non-deductible IRA. In some cases, you can’t make tax-deductible contributions to a traditional IRA, so you need another retirement savings account option. Though your contributions aren’t deductible in the tax year you make them, funds in the IRA that earn dividends or capital gains are not taxed, because the government doesn’t tax retirement savings twice.

Another reason people use non-deductible IRAs is as a stepping stone to a Roth IRA. Roth IRAs also have income limits, but they come with additional choices. High income earners can start by contributing funds to a non-deductible IRA, then convert that IRA into a Roth IRA. This is called a backdoor Roth IRA.

One thing to keep in mind with a backdoor Roth is that the conversion may not be entirely tax free. If an IRA account is made up of a combination of deductible and non-deductible contributions, when it gets converted into a Roth account some of those funds would be taxable.

Risks

The primary benefits of non-deductible IRAs come when used to later convert into a Roth IRA. It can be risky to keep a non-deductible IRA ongoing, especially if it’s made up of both deductible and non-deductible contributions, which can be tricky to keep track of for tax purposes. You can keep a blended IRA, it just takes more work to keep track of the amounts that are taxable.

As noted above, it requires dividing non-deductible contributions by the total contributions made to all IRAs one has in order to figure out the amount of after-tax contributions that have been made.

Non-Deductible IRA vs Roth IRA

With a non-deductible IRA, you contribute funds after you’ve paid taxes on that money, and therefore you’re not able to deduct the contributions from your income tax. The contributions that you make to the non-deductible IRA earn non-taxable interest while they are in the account. The money isn’t taxed when it is withdrawn later.

Roth IRA contributions are similarly made with after-tax money and one can’t get a tax deduction on them. Also, a Roth IRA allows an individual to take out tax-free distributions during retirement.

Unlike other types of retirement accounts, a Roth IRA doesn’t require the account holder to take out a minimum distribution amount.

There are income limits on Roth IRAs, so some high-income earners may not be able to open this type of account. The non-deductible IRA is one way to get around this rule, because an individual can start out with a non-deductible IRA and convert it into a Roth IRA.


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

How Can I Tell If a Non-Deductible IRA Is the Right Choice?

Non-deductible IRAs can be a way for high-income savers to make their way into a backdoor Roth account. This strategy can help them reduce the amount of taxes they owe on their savings. However, they may not be the best type of account for long-term savings or lower-income savers.

The Takeaway

For many people, contributing to an ordinary IRA is a clearcut proposition: You deposit pre-tax money, and the amount can be deducted from your income for that year. Things get more complicated, however, for higher earners who also have access (or their spouse has access) to an employer-sponsored plan like a 401(k) or 403(b). In that case, you may no longer qualify to deduct all your IRA contributions; some or all of that money may become non-deductible. That means you deposit funds post tax and you can’t deduct it from your income tax that year.

In either case, though, all the money in the IRA would grow tax free. And the upside, of course, is that with a non-deductible IRA the withdrawals are also tax free. With a regular IRA, because you haven’t paid taxes on your contributions, you owe tax when you withdraw money in retirement.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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


Photo credit: iStock/Drazen Zigic

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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