For many people, cash and cash equivalents are highly liquid assets that can help offset risk in a financial plan or investing portfolio. Cash equivalents are low-risk, low-yield investments that can be converted to cash quickly and are thus considered relatively stable in value.
For companies, though, cash and cash equivalents (CCE) refers to an accounting term. Cash and cash equivalents are listed at the top of a company’s balance sheet because they’re the most liquid of a company’s short-term assets. A company’s cash on hand can be considered one measure of its overall health.
It’s important for people to understand the role of cash and cash equivalents in their own asset allocation.
Key Points
• Cash and cash equivalents are highly liquid assets that provide stability in financial plans or portfolios.
• Cash refers to funds available for immediate use, while cash equivalents are short-term investments convertible to cash quickly.
• Cash equivalents include low-risk investments like CDs, money market accounts, and U.S. Treasuries.
• The primary difference between cash and cash equivalents is the specified maturity of cash equivalents.
• Cash and cash equivalents are crucial for offsetting risk and maintaining liquidity in investment portfolios.
What Are Cash and Cash Equivalents?
People keep their money in a variety of accounts and investments. For example, you might keep cash on deposit at a financial institution in a checking account, savings account, or certificate of deposit (CD).
Investments, on the other hand, may include stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate holdings, and more. Many investments fluctuate in value, and some investments can be quite volatile.
For that reason, people also tend to keep a portion of their portfolio in cash or cash equivalents, because while cash doesn’t typically grow in value, it also typically doesn’t fluctuate or lose value (although periods of inflation can take a bite out of the purchasing power of cash).
Cash refers to the funds in any account that are available for immediate use. Cash equivalents are short-term investment vehicles that can be converted to cash very quickly, or even immediately.
Difference Between Cash and Cash Equivalents
The primary difference between cash and cash equivalents is that cash equivalents are investment vehicles with a specified maturity. These can include certificates of deposit (CDs), money market accounts, U.S. Treasuries, and other low-risk, low-return investments.
If you’re considering opening a checking account, you wouldn’t be thinking about cash equivalents, but rather getting the best terms for the cash in your account. If you’re looking for added stability in an investment portfolio, you may want to consider cash equivalents.
How Do Cash Equivalents Work?
As noted above, the idea behind a cash equivalent is that it can be converted to cash swiftly. So the maturity for cash equivalents is generally 90 days (3 months) or less, whereas short-term investments mature in up to 12 months.
Cash equivalents have a known dollar amount because the prices of cash equivalents are usually stable, and they should be easy to sell in the market.
Types of Cash Equivalents
There are a number of cash equivalents investors can consider. Some offer higher or lower potential returns, and a wide variety of terms.
Certificates of Deposit (CDs)
Investing in a certificate of deposit, or CD is like a savings account, but with more restrictions and potentially a higher yield. With most CDs, you agree to let a bank keep your money for a specified amount of time, from a few months to a few years. In exchange, the bank agrees to pay you a guaranteed rate of interest when the CD matures.
If you withdraw the money before the maturity date, you’ll typically owe a penalty.
The longer the term of the CD, the more interest it typically pays, but it’s important to do your research and find the best terms.
CDs are similar to savings accounts in that you can deposit your money for a long period of time, these accounts are federally insured, so they’re considered safe. But you can’t add or withdraw money, generally speaking, until the CD matures.
There are a few different kinds of CDs that offer different features. Some bank CDs have variable rates that allow you to change the rate once during the term. There are also brokerage CDs, which are marketed as securities and sometimes sold by banks to investment companies.
Note that a CD that does not permit withdrawals, even with the payment of a penalty, can be considered an unbreakable CD. As such, it wouldn’t be considered a cash equivalent because it cannot readily be converted to cash.
US Treasury Bills
U.S. Treasury Securities are another type of conservative investment. They’re a type of bond or debt instrument, and they’re backed by the U.S. government.
Treasury bonds (T-bonds) usually mature in 20 or 30 years, but treasury bills or T-bills can be purchased with terms that range anywhere from a couple of days to a few weeks to a year.
Because Treasuries are popular, the market is active and they’re easy to sell if necessary. Still, Treasuries are affected by other types of risk, including inflation and changing interest rates.
While investors can expect to receive interest and principal payments as promised at maturity, if they attempt to sell the bond prior to maturity, they may receive more or less than the principal depending on current market conditions.
Other Government Bonds
Other government entities, including states and municipalities, may offer short-term bonds that could be considered cash equivalents. But investors must evaluate the creditworthiness of the entity offering the bond.
Because the funds’ short-term investments generally mature in less than 13 months, they’re generally considered very low risk. But unlike a savings or money market deposit account, they’re not federally insured. That means there’s no guarantee you’ll make back your investment, and it’s possible to lose money in a volatile market.
Savings and Money Market Accounts
A savings account has long been an essential money management tool. When you deposit your money in an FDIC-insured savings account, the Federal Deposit Insurance Corporation (FDIC) insures it up to the maximum amount allowed by law, so you can be sure your money is secure. Another bonus: You can make regular deposits and withdrawals (within federal limits) without committing to a term length or worrying about withdrawal penalties.
But a standard savings account could be a lower priority when you compare the interest rate offered to those of other bank products and cash equivalents. A high-yield savings account at an online bank or a money market account could also be FDIC-insured, so it’s safe, and pays more interest. However, in some cases, if your balance drops below a specified minimum, you might end up paying a monthly fee.
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Commercial Paper
Commercial paper refers to short-term debt issued by a corporation. These bonds carry different terms, maturity dates, and yields. Some can be considered cash equivalents.
Cash and Cash Equivalents vs Short-Term Investments
Investors might also consider including some short-term investments in their asset allocation as well, as these investments can offer higher returns vs. cash equivalents. The goal of short-term investments is to generate some return on capital, without incurring too much risk.
Short-term investments are also sometimes called marketable securities or temporary investments. Some include longer-term versions of the cash equivalents listed above (e.g. CDs, money market funds, U.S. Treasuries), and are meant to be redeemed within five years, but often less.
The Takeaway
Cash and cash equivalents perform an important role in many investors’ portfolios. These assets are considered highly liquid and less likely to fluctuate in value, especially when compared with equities and other securities that offer more growth potential, but more exposure to risk.
If you’re looking for ways to add to your cash holdings, it can also be wise to review your current banking partner.
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
What is a cash and cash equivalent example?
Cash equivalents are low-risk, low-yield investments that can be converted to cash quickly and are thus considered relatively stable in value. They can include bank accounts and some securities, such as short-term government bonds.
What asset class are Treasuries?
Treasury bonds (T-bonds) are one of four types of debt that are issued by the U.S. Department of the Treasury. These bonds are used to finance the U.S. government’s spending activities. The four types of debt are classified as Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation-Protected Securities (TIPS).
How do you determine cash and cash equivalents?
To determine cash and cash equivalents, add up cash balances and short-term investments.
SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. 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 (“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, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% 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 members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
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 4.00% 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 12/3/24. There is no minimum balance requirement. Additional information can be found 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.
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This content is provided for informational and educational purposes only and should not be construed as financial advice.
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You can sometimes reopen a closed bank account depending on the bank’s policies and the reasons for the closure. Accounts that you closed or that were closed due to inactive status tend to be easier to reopen than those that were terminated due to problems like frequent overdrafts. This guide will help you navigate having a closed bank account that you’d like to reopen.
Key Points
• Bank accounts can be closed by the owner or the bank for various reasons, including dissatisfaction, relocation, or financial issues.
• Closed accounts might be reopened depending on the bank’s policies and the reasons for closure.
• Dormant accounts require reactivation, which can often be resolved by making a transaction.
• Accounts closed due to excessive overdrafts may be reopened after settling outstanding balances.
• Fraudulent activities leading to account closure generally prevent reopening with the same bank.
Why Might You Need to Close a Bank Account?
Account holders may decide to close a bank account for a variety of reasons, including the following:
• No longer needing the account
• Moving to a new location
• Lack of convenience
• Dissatisfaction with the account
• Issues meeting minimum requirements
Here’s more about each.
No Longer Needing the Account
Sometimes, you simply might not need a bank account anymore. For example, if you’d set up a separate savings account to save enough money for a down payment on a house or for a vacation, after you’ve accomplished those goals, you might decide that you don’t need multiple bank accounts anymore.
Moving to a New Location
If you’re moving to a new community that doesn’t have a branch of your financial institution nearby, you may decide to close your bank account and open a new one that’s more readily accessible in your new town. Moving doesn’t create a problem when someone banks solely online, but it can lead someone to switch banks if they prefer in-person options.
Lack of Convenience
Another potential reason someone might switch banks is due to a lack of convenience, such as a bank’s hours being incompatible with their schedule or the bank not having a widespread enough network of ATMs so they wind up paying many ATM fees. When banking becomes inconvenient through a certain financial institution, that could spur someone to seek a more practical solution.
Dissatisfaction With the Account
Whether it’s poor customer service, a lack of desired services, or fees that are too high, customers sometimes close their accounts and go elsewhere because they aren’t satisfied with their current financial institution. If, for instance, you see an offer for a savings account that earns more interest and charges lower fees, you might decide to make a switch.
Issues Meeting Minimum Requirements
If a bank requires you to maintain a certain balance to keep the account open or to avoid hefty fees, an account holder may opt to close the account if they’re struggling to meet those requirements. By closing a savings account with a minimum balance that’s just out of reach, for instance, someone could avoid incurring fees each month when they don’t make the minimum balance requirement.
Is It Bad When a Bank Closes Your Account?
Whether it’s bad when a bank closes your account depends on why the bank closed it — and situations can vary. According to the governmental agency, the Office of the Comptroller of the Currency , banks typically can close accounts for nearly any reason without providing notice.
That being said, common reasons why a bank may close an account can include:
• Low or no activity: Banks may place an account in a dormant status after a certain period elapses with no transactions. With a dormant account, it’s not technically closed, but the account owner is no longer able to make transactions. How long it might take for an account to go dormant depends on both state laws and a particular bank’s policies.
After an account has been dormant for a period of time, a traditional or online bank may close the account and, if you can’t be reached, forward the funds to the proper state government, labeling them as “unclaimed property.” At this point, you’d need to submit a claim to your state’s treasury office to obtain that money.
• Suspicious activity: A bank will close an account if it has proven the account to be involved in fraudulent activity. When the bank initially suspects fraudulent behavior (whether the account holder was the perpetrator or the victim), the bank will likely freeze the account to investigate. Red flags can include large transactions, frequent account activity (especially if that activity is new or different), and transfers to overseas accounts.
• Excessive overdrafts: If an account holder regularly spends more from an account than what’s available, this leads to negative balances and bounced checks. A bank can charge overdraft fees and require that the account holder bring in sufficient funds to return the account back to the minimum balance required. If that happens frequently or if funds are not restored, however, the bank may close the account.
Worth noting: If your bank account is closed due to a negative balance or suspicion of fraudulent activity, this may make it difficult for you to open a new bank account. Those issues will be on your record with ChexSystems, an industry reporting agency. You might need to explore what are known as second chance checking accounts in order to open a bank account again.
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Do You Get Your Money If a Bank Closes Your Account?
By law, a bank must refund to you any money in a closed account after subtracting fees that are due. Typically, a check will be sent to the account holder. There is a possibility that the bank might move the money into a different type of account.
If the bank cannot reach you about this matter, your funds could be sent to the state as unclaimed money.
How Long Do Banks Keep Closed Accounts?
For deposit accounts of $100 or more, a bank must retain records for at least five years. However, this doesn’t necessarily mean that you can reopen the account within that time frame.
You’ll learn more about how you might reopen a closed account below.
Can You Reopen a Closed Bank Account?
There isn’t a simple yes/no answer to “Can a closed bank account be reopened?” You may be able to reopen a closed bank account in some situations. It will depend, however, on why the account was closed and your financial institution’s policies.
Usually, it’s a wise move to contact the bank, find out why your account has been closed, and see if it’s possible to use it again. You might be able to reactivate a dormant account simply by making a withdrawal or depositing funds (see below for more details). But if a bank account has been closed due to, say, suspicions of fraud, you may not be able to reinstate it.
Next, you’ll learn the steps involved if you do try to reopen a closed bank account.
How Do You Reopen a Closed Bank Account?
If you’ve closed your account (rather than a bank doing so), you can typically submit a request to reopen, say, your checking account. This can be done online, over the phone, or by visiting a branch in person, with the exact process varying depending on the specific financial institution.
Another option you have in this situation is to simply open a new bank account, whether at your previous financial institution or at another one of your choice. When choosing your account, it’s worth exploring the different types of savings accounts you might consider.
On the other hand, if your bank account gets closed by a bank, whether or not you can reopen it largely depends on the reason for the closure as well as your bank’s policies.
In general, the first step in reinstating a troubled account is to talk to your financial institution about why your account was frozen, put into dormant status, or closed. Ask what you need to do to address the issues. You can also review your account agreement. If you believe that a bank wrongfully closed your account, you can file a written complaint .
Here’s guidance on how to reopen a closed bank account in three scenarios.
Reopening a Dormant/Inactive Account
This is one of the simplest issues to address. If you receive a notification that your account is considered inactive or dormant, contact your bank to find out how to make it active again. The bank may allow you to make a deposit to the old account, or they may have you open a new bank account.
Reopening an Account After Closure Due to Excessive Overdraft
Financial institutions need to monitor their levels of risk. If they close a bank account for excessive overdrafts, the account holder would likely need to talk to the bank to see if they are willing to reopen the old account or if they’d allow them to open a new one. Different banks will have different policies. You may be required to pay off your negative balance, sometimes within a specified timeframe, before you can reopen your account.
Reopening an Account Closed for Suspicious or Fraudulent Activities
If a bank believes that a customer is engaged in fraudulent behavior (rather than being a victim of it), then it may be difficult to reopen an account or to open a new one with the institution. Contact the financial institution, and be prepared to demonstrate how any activity in your account that appeared suspicious was, in fact, not fraudulent or not your fault.
How to Prevent Bank Account Closures
In order to avoid your bank account being closed, it’s a good idea to:
• Use it regularly so it doesn’t go dormant.
• Set up alerts for a low balance. That way, you can remedy a situation which could lead to closure due to your overdrafting.
• Review communication from your bank. You might get a notice that your account has issues, but if you don’t read it, you can’t take steps to prevent closure.
Whether or not you can reopen a closed bank account largely depends on why it was closed in the first place. Sometimes, an account holder in good standing decides to close a bank account and later changes their mind. In that case, the financial institution will almost certainly allow them to have an account there again. Other times, the bank closed the account, perhaps because of excessive overdrafts, suspicious activity, or lack of use. In those instances, talk to the financial institution to see what steps you need to take.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.
FAQ
Can a bank close your account?
Yes, it can. According to a governmental agency that oversees financial transactions, banks can close accounts for virtually any reason without notice.
Is it bad when a bank closes your account?
Whether it’s bad depends upon the reason why the bank closes your account. Sometimes, a bank account is closed because of inactivity. Other times, it can be a more concerning situation, one that can make it harder to open an account in the future. For instance, the bank may have flagged the account for suspicious or fraudulent activity. Another reason why a bank may close an account is excessive overdrafts.
Can you reopen a closed account?
Whether you can reopen a closed account depends on who closed the account (you or the bank), the reasons why the account was closed, and the bank’s policies. Talk to your financial institution to find out what steps you would need to take in order to reopen your account.
How do I prevent my bank account from being closed?
To prevent your bank account from getting closed, use the account regularly and set up low balance alerts so you can avoid overdrafting. If your account is troubled, talk to your financial institution. Explore what solutions might exist to keep your account open and return it to good standing. It might also be beneficial to brush up on your financial habits and the basics, such as how savings accounts work.
Will a direct deposit reopen a closed account?
No. If an account is closed, the direct deposit funds will have nowhere to be deposited and so the transaction will not go through. To address this situation, talk to your bank about reopening the account and let the payer know that there is an issue with the account tied to your direct deposit.
SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. 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 (“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, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% 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 members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
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 4.00% 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 12/3/24. There is no minimum balance requirement. Additional information can be found 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.
This content is provided for informational and educational purposes only and should not be construed as financial advice.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
One thing you should always look out for — regardless of the type of loan you’re applying for — is a loan origination fee. Many lenders charge origination fees for new loans to help cover costs on their end. What these fees are called and what they amount to, however, can vary quite a bit from lender to lender.
Knowing these things about origination fees before you settle on a lender can help you make the best borrowing decision for your financial situation.
What Is a Loan Origination Fee?
An origination fee is a cost the lender charges for a new loan. It’s a one-time expense you are generally asked to pay at the time the loan closes. The fee covers the costs the lender incurs for processing and closing the loan.
How Are Origination Fees Determined?
Loan origination fees depend on a number of factors. They include:
• Loan type
• Amount of loan
• Credit score
• Inclusion of a cosigner
• Your financial situation, including assets, liabilities, and total income
Do I Have to Pay Origination Fees?
You don’t necessarily have to pay origination fees — while most lenders charge this fee, not all do. Additionally, origination fees may be negotiable. If you ask, a lender could simply lower the fee, or they could offer a credit to offset at least a portion of it. Or, they might agree to lower the fees if you pay a higher interest rate.
To minimize the sting of loan origination fees, research your loan options. Compare how much you’d pay overall for different loan offers, factoring in the term of the loan, the interest rate, and any fees.
One way to effectively compare and contrast different loan options is to check each loan’s annual percentage rate (APR), an important mortgage basic to understand. A loan’s APR provides a more comprehensive look at the cost you’ll incur over the life of the loan. This is because the APR factors in the fees and costs associated with the loan, in addition to the loan’s interest rate.
The Truth in Lending Act requires lenders to disclose an APR for all types of loans. Along with the APR, you’ll also see any fees that a lender may charge listed, including prepayment penalties.
How Much Are Loan Origination Fees?
How much a lender charges — and what the fee is called — varies based on the type of loan and the lender.
A traditional origination fee is usually calculated based on a percentage of the loan amount — and that percentage depends on the type of loan. For a mortgage, for instance, an origination fee is generally 0.50% to 1%. Origination fees for personal loans, on the other hand, can range from 1% to 8% of the loan amount, depending on a borrower’s credit score as well as the length, amount, and sometimes intended use of the loan.
There are a variety of other origination fees that lenders may charge, and these can be flat charges rather than percentages of loan amounts. Other fees that lenders may charge to originate a loan could be called processing, underwriting, administration, or document preparation fees.
Can Loan Origination Fees Affect Your Taxes?
Loan origination fees, categorized by the IRS as points, may be deductible as home mortgage interest. This can be the case even if the seller pays them. Borrowers who can deduct all of the interest on their mortgage may even be able to deduct all of the points, or loan origination fees, paid on their mortgage.
To claim this deduction, borrowers must meet certain conditions laid out by the IRS. They’ll then need to itemize deductions on Schedule A (Form 1040), Itemized Deductions.
The Takeaway
Loan origination fees are important to consider when shopping for a loan during the home-buying process. These fees are charged by lenders to help cover their costs of processing and closing a new loan application. While many lenders charge origination fees, not all do, and some may be willing to negotiate.
Origination fees are just one reason it’s important to shop around and compare home loans. With a SoFi Home Loan, for instance, qualified first-time homebuyers can make a down payment as low as 3%.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
SoFi Mortgages: simple, smart, and so affordable.
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
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.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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.
Retirement will likely be the most significant expense of your lifetime, which means saving for retirement is a big job. This is especially true if you envision a retirement that is rich with experiences such as traveling through Europe or spending time with your grown children and grandkids. A retirement savings plan may help you achieve these financial goals and stay on track.
There are all types of retirement plans you may consider to help you build your wealth, from 401(k)s to Individual Retirement Accounts (IRAs) to annuities. Understanding the nuances of these different retirement plans, like their tax benefits and various drawbacks, may help you choose the right mix of plans to achieve your financial goals.
Key Points
• There are various types of retirement plans, including traditional and non-traditional options, such as 401(k), IRA, Roth IRA, SEP IRA, and Cash-Balance Plan.
• Employers offer defined contribution plans (e.g., 401(k)) where employees contribute and have access to the funds, and defined benefit plans (e.g., Pension Plans) where employers invest for employees’ retirement.
• Different retirement plans have varying tax benefits, contribution limits, and employer matches, which should be considered when choosing a plan.
• Individual retirement plans like Traditional IRA and Roth IRA provide tax advantages but have contribution restrictions and penalties for early withdrawals.
• It’s possible to have multiple retirement plans, including different types and accounts of the same type, but there are limitations on tax benefits based on the IRS regulations.
🛈 SoFi does not offer employer-sponsored plans, such as 401(k) or 403(b) plans, but we do offer a range of individual retirement accounts (IRAs).
Types of Retirement Accounts
There are several different types of retirement plans, including some traditional plan types you may be familiar with as well as non-traditional options.
Traditional retirement plans can be IRA accounts or 401(k). These tax-deferred retirement plans allow you to contribute pre-tax dollars to an account. With a traditional IRA or 401(k), you only pay taxes on your investments when you withdraw from the account.
Non-traditional retirement accounts can include Roth 401(k)s and IRAs, for which you pay taxes on funds before contributing them to the account and withdraw money tax-free in retirement.
Here’s information about some of the most common retirement plan types:
There are typically two types of retirement plans offered by employers:
• Defined contribution plans (more common): The employee invests a portion of their paycheck into a retirement account. Sometimes, the employer will match up to a certain amount (e.g. up to 5%). In retirement, the employee has access to the funds they’ve invested. 401(k)s and Roth 401(k)s are examples of defined contribution plans.
• Defined benefit plans (less common): The employer invests money for retirement on behalf of the employee. Upon retirement, the employee receives a regular payment, which is typically calculated based on factors like the employee’s final or average salary, age, and length of service. As long as they meet the plan’s eligibility requirements, they will receive this fixed benefit (e.g. $100 per month). Pension plans and cash balance accounts are common examples of defined benefit plans.
Let’s get into the specific types of plans employers usually offer.
401(k) Plans
A 401(k) plan is a type of work retirement plan offered to the employees of a company. Traditional 401(k)s allow employees to contribute pre-tax dollars, where Roth 401(k)s allow after-tax contributions.
• Income Taxes: If you choose to make a pre-tax contribution, your contributions may reduce your taxable income. Additionally, the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement. Some employers allow you to make after-tax or Roth contributions to a 401(k). You should check with your employer to see if those are options.
• Contribution Limit: $23,000 in 2024 and $23,500 in 2025 for the employee; people 50 and older can contribute an additional $7,500 in 2024 and 2025. However, in 2025, under the SECURE 2.0 Act, a higher catch-up limit of $11,250 applies to individuals ages 60 to 63.
• Pros: Money is deducted from your paycheck, automating the process of saving. Some companies offer a company match. There is a significantly higher limit than with Traditional IRA and Roth IRA accounts.
• Cons: With a 401(k) plan, you are largely at the mercy of your employer — there’s no guarantee they will pick plans that you feel are right for you or are cost effective for what they offer. Also, the value of a 401(k) comes from two things: the pre-tax contributions and the employer match, if your employer doesn’t match, a 401(k) may not be as valuable to an investor. There are also penalties for early withdrawals before age 59 ½, although there are some exceptions, including for certain public employees.
• Usually best for: Someone who works for a company that offers one, especially if the employer provides a matching contribution. A 401(k) retirement plan can also be especially useful for people who want to put retirement savings on autopilot.
• To consider: Sometimes 401(k) plans have account maintenance or other fees. Because a 401(k) plan is set up by your employer, investors only get to choose from the investment options they provide.
403(b) Plans
A 403(b) retirement plan is like a 401(k) for certain individuals employed by public schools, churches, and other tax-exempt organizations. Like a 401(k), there are both traditional and Roth 403(b) plans. However, not all employees may be able to access a Roth 403(b).
• Income Taxes: With a traditional 403(b) plan, you contribute pre-tax money into the account; the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement. Additionally, some employers allow you to make after-tax or Roth contributions to a 403(b); the money will grow tax-deferred and you will not have to pay taxes on withdrawals in retirement. You should check with your employer to see if those are options.
• Contribution Limit: $23,000 in 2024 and $23,500 in 2025 for the employee; people 50 and older can contribute an additional $7,500 in both of those years. In 2025, under the SECURE 2.0 Act, those ages 60 to 63 can contribute a higher catch-up amount of $11,250. The maximum combined amount both the employer and the employee can contribute annually to the plan (not including the catch-up amounts) is generally the lesser of $69,000 in 2024 and $70,000 in 2025 or the employee’s most recent annual salary.
• Pros: Money is deducted from your paycheck, automating the process of saving. Some companies offer a company match. Also, these plans often come with lower administrative costs because they aren’t subject to Employee Retirement Income Security Act (ERISA) oversight.
• Cons: A 403(b) account generally lacks the same protection from creditors as plans with ERISA compliance.
• To consider: 403(b) plans offer a narrow choice of investments compared to other retirement savings plans. The IRS states these plans can only offer annuities provided through an insurance company and a custodial account invested in mutual funds.
Solo 401(k) Plans
A Solo 401(k) plan is essentially a one-person 401(k) plan for self-employed individuals or business owners with no employees, in which you are the employer and the employee. Solo 401(k) plans may also be called a Solo-k, Uni-k, or One-participant k.
• Income Taxes: The contributions made to the plan are tax-deductible.
• Contribution Limit: $23,000 in 2024 and $23,500 in 2025, or 100% of your earned income, whichever is lower, plus “employer” contributions of up to 25% of your compensation from the business. The 2024 total cannot exceed $69,000, and the 2025 total cannot exceed $70,000. (On top of that, people 50 and older are allowed to contribute an additional $7,500 in 2024 and 2025. In 2025, those ages 60 to 63 can contribute a higher catch-up amount of $11,250 under the SECURE 2.0 Act .)
• Pros: A solo 401(k) retirement plan allows for large amounts of money to be invested with pre-tax dollars. It provides some of the benefits of a traditional 401(k) for those who don’t have access to a traditional employer-sponsored 401(k) retirement account.
• Cons: You can’t open a solo 401(k) if you have any employees (though you can hire your spouse so they can also contribute to the plan as an employee — and you can match their contributions as the employer).
• Usually best for: Self-employed people with enough income and a large enough business to fully use the plan.
SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)
A SIMPLE IRA plan is set up by an employer, who is required to contribute on employees’ behalf, although employees are not required to contribute.
• Income Taxes: Employee contributions are made with pre-tax dollars. Additionally, the money will grow tax-deferred and employees will pay taxes on the withdrawals in retirement.
• Contribution Limit: $16,000 in 2024 and $16,500 in 2025. Employees aged 50 and over can contribute an extra $3,500 in 2024 and in 2025, bringing their total to $19,500 in 2024 and $20,000 in 2025. In 2025, under the SECURE 2.0 Act, people ages 60 to 63 can contribute a higher catch-up amount of $5,250.
• Pros: Employers contribute to eligible employees’ retirement accounts at 2% their salaries, whether or not the employees contribute themselves. For employees who do contribute, the company will match up to 3%.
• Cons: The contribution limits for employees are lower than in a 401(k) and the penalties for early withdrawals — up to 25% for withdrawals within two years of your first contribution to the plan — before age 59 ½ may be higher.
• To consider: Only employers with less than 100 employees are allowed to participate.
This is a retirement account established by a small business owner or self-employed person for themselves (and if applicable, any employees).
• Income Taxes: Your contributions will reduce your taxable income. Additionally, the money will grow tax-deferred and you will pay taxes on withdrawals in retirement.
• Contribution Limit: For 2024, $69,000 or 25% of earned income, whichever is lower; for 2025, $70,000 or 25% of earned income, whichever is lower.
• Pros: Higher contribution limit than IRA and Roth IRAs, and contributions are tax deductible for the business owner.
• Cons: These plans are employer contribution only and greatly rely on the financial wherewithal and available cash of the business itself.
• Usually best for: Self-employed people and small business owners who wish to contribute to an IRA for themselves and/or their employees.
• To consider: Because you’re setting up a retirement plan for a business, there’s more paperwork and unique rules. When opening an employer-sponsored retirement plan, it generally helps to consult a tax advisor.
Profit-Sharing Plans (PSPs)
A Profit-Sharing Plan is a retirement plan funded by discretionary employer contributions that gives employees a share in the profits of a company.
• Income taxes: Deferred; assessed on distributions from the account in retirement.
• Contribution Limit: The lesser of 25% of the employee’s compensation or $69,000 in 2024. (On top of that, people 50 and older are allowed to contribute an additional $7,500 in 2024.) In 2025, the contribution limit is $70,000 or 25% of the employee’s compensation, whichever is less. Those 50 and up can contribute an extra $7,500 in 2024 and 2025. And people ages 60 to 63 can make a higher contribution of $11,250 in 2025 under SECURE 2.0.
• Pros: An employee receives a percentage of a company’s profits based on its earnings. Companies can set these up in addition to other qualified retirement plans, and make contributions on a completely voluntary basis.
• Cons: These plans put employees at the mercy of their employers’ profits, unlike retirement plans that allow employees to invest in securities issued by other companies.
• Usually best for: Companies who want the flexibility to contribute to a PSP on an ad hoc basis.
• To consider: Early withdrawal from the plan is subject to penalty.
Defined Benefit Plans (Pension Plans)
These plans, more commonly known as pension plans, are retirement plans provided by the employer where an employee’s retirement benefits are calculated using a formula that factors in age, salary, and length of employment.
• Income taxes: Deferred; assessed on distributions from the plan in retirement.
• Contribution limit: Determined by an enrolled actuary and the employer.
• Pros: Provides tax benefits to both the employer and employee and provides a fixed payout upon retirement that many retirees find desirable.
• Cons: These plans are increasingly rare, but for those who do have them, issues can include difficulty realizing or accessing benefits if you don’t work at a company for long enough.
• Usually best for: Companies that want to provide their employees with a “defined” or pre-determined benefit in their retirement years.
• To consider: These plans are becoming less popular because they cost an employer significantly more in upkeep than a defined contribution plan such as a 401(k) program.
Employee Stock Ownership Plans (ESOPs)
An Employee Stock Ownership Plan is a qualified defined contribution plan that invests in the stock of the sponsoring employer.
• Income taxes: Deferred. When an employee leaves a company or retires, they receive the fair market value for the stock they own. They can either take a taxable distribution or roll the money into an IRA.
• Contribution limits: Allocations are made by the employer, usually on the basis of relative pay. There is typically a vesting schedule where employees gain access to shares in one to six years.
• Pros: Could provide tax advantages to the employee. ESOP plans also align the interests of a company and its employees.
• Cons: These plans concentrate risk for employees: An employee already risks losing their job if an employer is doing poorly financially, by making some of their compensation employee stock, that risk is magnified. In contrast, other retirement plans allow an employee to invest in stocks in other securities that are not tied to the financial performance of their employer.
457(b) Plans
A 457(b) retirement plan is an employer-sponsored deferred compensation plan for employees of state and local government agencies and some tax-exempt organizations.
• Income taxes: If you choose to make a pre-tax contribution, your contributions will reduce your taxable income. Additionally, the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement. Some employers also allow you to make after-tax or Roth contributions to a 401(k).
• Contribution limits: The lesser of 100% of employee’s compensation or $23,000 in 2024 and $23,500 in 2025; some plans allow for “catch-up” contributions.
• Pros: Plan participants can withdraw as soon as they are retired at any age, they do not have to wait until age 59 ½ as with 401(k) and 403(b) plans.
• Cons: 457 plans do not have the same kind of employer match as a 401(k) plan. While employers can contribute to the plan, it’s only up to the combined limit for individual contributions.
• Usually best for: Employees of governmental agencies.
Federal Employees Retirement System (FERS)
The Federal Employees Retirement System (FERS) consists of three government-sponsored retirement plans: Social Security, the Basic Benefit Plan, and the Thrift Savings Plan.
The Basic Benefit Plan is an employer-provided pension plan, while the Thrift Savings Plan is most comparable to what private-sector employees can receive.
• Income Taxes: Contributions to the Thrift Savings Plan are made before taxes and grow tax-free until withdrawal in retirement.
• Contribution Limit: The contribution limit for employees is $23,000 in 2024, and the combined limit for all contributions, including from the employer, is $69,000. In 2025, the employee contribution limit is $23,500, and the combined limit for contributions, including those from the employer, is $70,000. Also, those 50 and over are eligible to make an additional $7,500 in “catch-up” contributions in both 2024 and 2025, and in 2025, those ages 60 to 63 can make a higher catch-up contribution of $11,250 under the SECURE 2.0 Act.
• Pros: These government-sponsored plans are renowned for their low administrative fees and employer matches.
• Cons: Only available for federal government employees.
• Usually best for: Federal government employees who will work at their agencies for a long period; it is comparable to 401(k) plans in the private sector.
Cash-Balance Plans
This is another type of pension plan that combines features of defined benefit and defined contribution plans. They are sometimes offered by employers that previously had defined benefit plans. The plans provide an employee an “employer contribution equal to a percent of each year’s earnings and a rate of return on that contribution.”
• Income Taxes: Contributions come out of pre-tax income, similar to 401(k).
• Contribution Limit: The plans combine a “pay credit” based on an employee’s salary and an “interest credit” that’s a certain percentage rate; the employee then gets an account balance worth of benefits upon retirement that can be paid out as an annuity (payments for life) or a lump sum. Limits depend on age, but for those over 60, they can be more than $250,000.
• Pros: Can reduce taxable income.
• Cons: Cash-balance plans have high administrative costs.
• Usually best for: High earners, business owners with consistent income.
Nonqualified Deferred Compensation Plans (NQDC)
These are plans typically designed for executives at companies who have maxed out other retirement plans. The plans defer payments — and the taxes — you would otherwise receive as salary to a later date.
• Income Taxes: Income taxes are deferred until you receive the payments at the agreed-upon date.
• Contribution Limit: None
• Pros: The plans don’t have to be entirely geared around retirement. While you can set dates with some flexibility, they are fixed.
• Cons: Employees are not usually able to take early withdrawals.
• Usually best for: Highly-paid employees for whom typical retirement plans would not provide enough savings compared to their income.
Multiple Employer Plans
A multiple employer plan (MEP) is a retirement savings plan offered to employees by two or more unrelated employers. It is designed to encourage smaller businesses to share the administrative burden of offering a tax-advantaged retirement savings plan to their employees. These employers pool their resources together to offer a defined benefit or defined contribution plan for their employees.
Administrative and fiduciary responsibilities of the MEP are performed by a third party (known as the MEP Sponsor), which may be a trade group or an organization that specializes in human resources management.
This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.
Compare Types of Retirement Accounts Offered by Employers
To recap retirement plans offered by employers:
Retirement Plans Offered by Employers
Type of Retirement Plan
May be Funded By
Pro
Con
401(k)
Employee and Employer
Contributions are deducted from paycheck
Limited investment options
Solo 401(k)
Employee and Employer
Good for self-employed people
Not available for business owners that have employees
403(b)
Employee and Employer
Contributions are deducted from paycheck
Usually offer a narrow choice of investment options
SIMPLE IRA
Employer and Employee
Employer contributes to account
High penalties for early withdrawals
SEP Plan
Employer
High contribution limits
Employer decides whether and how much to contribute each year
Profit-Sharing Plan
Employer
Can be paired with other qualified retirement plans
Plan depends on an employer’s profits
Defined Benefit Plan
Employer
Fixed payout upon retirement
May be difficult to access benefits
Employee Stock Ownership Plan
Employer
Aligns interest of a company and its employees
May be risky for employees
457
Employee
You don’t have to wait until age 59 ½ to withdraw
Does not have same employer match possibility like a 401(k)
Federal Employees Retirement System
Employee and Employer
Low administrative fees
Only available for federal government employees
Cash-Balance Plan
Employer
Can reduce taxable income
High administrative costs
Nonqualified Deferred Compensation Plan
Employer
Don’t have to be retirement focused
Employees are not usually able to take early withdrawals
Get a 1% IRA match on rollovers and contributions.
Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1
1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.
With an IRA, you open and fund the IRA yourself. As the name suggestions, it is a retirement plan for individuals. This is not a plan you join through an employer.
• Income Taxes: You may receive an income tax deduction on contributions (depending on your income and access to another retirement plan through work). The balance in the IRA is tax-deferred, and withdrawals will be taxed (the amount will vary depending on whether contributions were deductible or non-deductible).
• Contribution Limit: In 2024 and 2025, the contribution limit is $7,000, or $8,000 for people 50 and older.
• Pros: You might be able to lower your tax bill if you’re eligible to make deductible contributions. Additionally, the money in the account is tax-deferred, which can make a difference over a long period of time. Finally, there are no income limits for contributing to a traditional IRA.
• Cons: Traditional IRAs come with a number of restrictions, including how much can be contributed and when you can start withdrawals without penalty. Traditional IRAs are also essentially a guess on the tax rate you will be paying when you begin withdrawals after age 59 ½, as the money in these accounts are tax-deferred but are taxed upon withdrawal. Also, traditional IRAs generally mandate withdrawals starting at age 73.
• Usually best for: People who can make deductible contributions and want to lower their tax bill, or individuals who earn too much money to contribute directly to a Roth IRA. Higher-income earners might not get to deduct contributions from their taxes now, but they can take advantage of tax-deferred growth between now and retirement. An IRA can also be used for consolidating and rolling over 401(k) accounts from previous jobs.
• To consider: You may be subject to a 10% penalty for withdrawing funds before age 59 ½. As a single filer, you cannot deduct IRA contributions if you’re already covered by a retirement account through your work and earn more (according to your modified gross adjusted income) than $87,000 in 2024, with a phase-out starting at $77,000, and more than $89,000 in 2025, with a phase-out starting at $79,000.
Roth IRAs
A Roth IRA is another retirement plan for individuals that is managed by the account holder, not an employer.
• Income Taxes: Roth IRA contributions are made with after-tax money, which means you won’t receive an income tax deduction for contributions. But your balance will grow tax-free and you’ll be able to withdraw the money tax-free in retirement.
• Contribution Limit: In 2024 and 2025, the contribution limit is $7,000, or $8,000 for those 50 and up.
• Pros: While contributing to a Roth IRA won’t lower your tax bill now, having the money grow tax-free and being able to withdraw the money tax-free down the road could provide value in the future.
• Cons: Like a traditional IRA, a Roth IRA has tight contribution restrictions. Unlike a traditional IRA, it does not offer tax deductions for contributions. As with a traditional IRA, there’s a penalty for taking some kinds of distributions before age 59 ½.
• Usually best for: Someone who wants to take advantage of the flexibility to withdraw from an account during retirement without paying taxes. Additionally, it can be especially beneficial for people who are currently in a low income-tax bracket and expect to be in a higher income tax bracket in the future.
• To consider: To contribute to a Roth IRA, you must have an earned income. Your ability to contribute begins to phase out when your income as a single filer (specifically, your modified adjusted gross income) reaches $146,000 in 2024 and $150,000 in 2025. As a joint filer, your ability to contribute to a Roth IRA phases out at $230,000 in 2024 and $236,000 in 2025.
Payroll Deduction IRAs
This is either a traditional or Roth IRA that is funded through payroll deductions.
• Income Taxes: For a Traditional IRA, you may receive an income tax deduction on contributions (depending on income and access to a retirement plan through work); the balance in the IRA will always grow tax-deferred, and withdrawals will be taxed (how much is taxed depends on if you made deductible or non-deductible contributions). For a Roth IRA, contributions are made with after-tax money, your balance will grow tax-free and you’ll be able to withdraw the money tax-free in retirement.
• Contribution Limit: In 2024 and 2025, the limit is $7,000, or $8,000 for those 50 and older.
• Pros: Automatically deposits money from your paycheck into a retirement account.
• Cons: The employee must do the work of setting up a plan, and employers can not contribute to it as with a 401(k). Participants cannot borrow against the retirement plan or use it as collateral for loans.
• Usually best for: People who do not have access to another retirement plan through their employer.
• To consider: These have the same rules as a Traditional IRA, such as a 10% penalty for withdrawing funds before age 59 ½. Only employees can contribute to a Payroll Deduction IRA.
Guaranteed Income Annuities (GIAs)
Guaranteed Income Annuities are products sold by insurance companies. They are similar to the increasingly rare defined benefit pensions in that they have a fixed payout that will last until the end of life. These products are generally available to people who are already eligible to receive payouts from their retirement plans.
• Income Taxes: If the annuity is funded by 401(k) benefits, then it is taxed like income. Annuities purchased with Roth IRAs, however, have a different tax structure. For “non-qualified annuities,” i.e. annuities purchased with after-tax income, a formula is used to determine the taxes so that the earnings and principal can be separated out.
• Contribution Limit: Annuities typically do not have contribution limits.
• Pros: These are designed to allow for payouts until the end of life and are fixed, meaning they’re not dependent on market performance.
• Cons: Annuities are expensive; to buy an annuity, you’ll likely pay a high commission to a financial advisor or insurance salesperson.
• Usually best for: People who have high levels of savings and can afford to make expensive initial payments on annuities.
Cash-Value Life Insurance Plan
Cash-value life insurance typically covers the policyholder’s entire life and has tax-deferred savings, making it comparable to other retirement plans. Some of the premium paid every month goes to this investment product, which grows over time.
• Income Taxes: Taxes are deferred until the policy is withdrawn from, at which point withdrawals are taxed at the policyholder’s current income tax rate.
• Contribution Limit: The plan is drawn up with an insurance company with set premiums.
• Pros: These plans have a tax-deferring feature and can be borrowed from.
• Cons: While you may be able to withdraw money from the plan, this will reduce your death benefit.
• Usually best for: High earners who have maxed out other retirement plans.
Compare Types of Retirement Accounts Not Offered by Employers
To recap retirement plans not offered by employers:
Retirement Plans Not Offered by Employers
Type of Retirement Plan
Pro
Con
IRA
Contributions may be tax deductible
Penalty for withdrawing funds before age 59 ½
Roth IRA
Distributions are not taxed
Not available for individuals with high incomes
Payroll Deduction IRA
Automatically deposits money from your paycheck into the account
Participants can’t borrow against the plan
Guaranteed Income Annuity
Not dependent on market performance
Expensive fees and commissions
Cash-Value Life Insurance Plan
Tax-deferred savings
May be able to withdraw money from the plan, but this will reduce death benefit
Specific Benefits to Consider
As you’re considering the different types of retirement plans, it’s important to look at some key benefits of each plan. These include:
• the tax advantage
• contribution limits
• whether an employer will add funds to the account
• any fees associated with the account
💡 Quick Tip: 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.
Determining Which Type of Retirement Plan Is Best for You
Depending on your employment circumstances, there are many possible retirement plans in which you can invest money for retirement. Some are offered by employers, while other retirement plans can be set up by an individual. Brian Walsh, a CFP® at SoFi, says “a mixture of different types of accounts help you best plan your retirement income strategy down the road.”
Likewise, the benefits for each of the available retirement plans differ. Here are some specific benefits and disadvantages of a few different plans to consider.
With employer-offered plans like a 401(k) and 403(b), you have the ability to:
Take them with you. If you leave your job, you can roll these plans over into a plan with a new employer or an IRA.
Possibly earn a higher return. With these plans, you typically have more investment choices, including stock funds.
With retirement plans not offered by employers, like a SEP IRA, you may get:
A wider variety of investment options. You could have even more options to choose from with these plans, including those that may offer higher returns.
You may be able to contribute more. The contribution limits for some of these plans tend to be higher.
Despite their differences, the many different types of retirement accounts all share one positive attribute: utilizing and investing in them is an important step in saving for retirement.
Because there are so many retirement plans to choose from, it may be wise to talk to a financial professional to help you decide your financial plan.
Can You Have Multiple Types of Retirement Plans?
You can have multiple retirement savings plans, whether employer-provided plans like a 401(k), IRAs, or annuities. Having various plans can let you take advantage of the specific benefits that different retirement savings plans offer, thus potentially increasing your total retirement savings.
Additionally, you can have multiple retirement accounts of the same type; you may have a 401(k) at your current job while also maintaining a 401(k) from your previous employer.
Nonetheless, there are limitations on the tax benefits you may be allowed to receive from these multiple retirement plans. For example, the IRS does not allow individuals to take a tax deduction for traditional IRA contributions if they also have an employer-sponsored 401(k).
Opening a Retirement Investment Account With SoFi
Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Easily manage your retirement savings with a SoFi IRA.
FAQ
Why is it important to understand the different types of retirement plans?
Understanding the different types of retirement plans is important because of the nuances of taxation in these accounts. The various rules imposed by the Internal Revenue Service (IRS) can affect your contributions, earnings, and withdrawals. And not only does the IRS have rules around taxation, but also about contribution limits and when you can withdraw money without penalties.
Additionally, the various types of retirement plans differ regarding who establishes and uses each account and the other plan rules. Ultimately, understanding these differences will help you determine which combination of retirement plans is best for you.
How can you determine which type of retirement plan is best for you?
The best type of retirement plan for you is the one that best meets your needs. Many types of retirement plans are available, and each has its own benefits and drawbacks. When choosing a retirement plan, some factors to consider include your age, investing time horizon, financial goals, risk tolerance, and the fees associated with a retirement plan.
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Car refinancing is a financial tool that allows you to change the terms of your existing auto loan. It can offer benefits such as lowering your monthly car payment and reducing the interest you pay, but also comes with potential drawbacks like added costs and longer loan terms. Below, we’ll explore what car refinancing entails, its advantages and disadvantages, and alternative options to help you make the best choice for your financial situation.
Key Points
• If you can qualify for a lower interest rate, car refinancing can save a significant amount of money over the life of the loan.
• Refinancing can lower your monthly payments if you can get a lower rate or you extend your loan term.
• If you refinance to a longer loan term, you will likely pay more in interest over the course of the loan.
• Potential downsides of car refinancing include fees, negative equity, and a temporary impact on your credit score.
• Alternatives to car refinancing include balance transfer credit cards and personal loans.
What Is a Car Refinance?
Car refinancing involves replacing your current car loan with a new one, typically from a different lender. You use the new loan to pay off the balance of your existing loan, and you begin repaying the new lender based on updated terms.
The main goal of car refinancing is typically to secure better loan terms, such as a lower interest rate, reduced monthly payments, or a shorter loan term. But refinancing also comes with costs and risks, so it’s important to weigh the benefits and drawbacks carefully before you jump in.
Pros of Refinancing a Car Loan
Here’s a look at some of the key benefits of refinancing your current auto loan.
You May Reduce Your Rate
A major pro of refinancing is the potential to secure a lower interest rate. If interest rates have decreased since you took out your original loan or your credit score has improved, refinancing could help you score a better rate, and lower the total interest you pay over the loan’s life. Also, if you took out dealer financing and didn’t shop around for a loan when you bought your car, it’s possible you’re paying a higher rate than necessary. Reducing your interest rate by just two or three percentage points could help you save thousands over the life of your loan.
Refinancing can also lower your monthly payments, either by lowering your interest rate, extending the loan term, or both. This can free up funds in your budget for other expenses, and might provide much-needed financial relief. It can also keep you from falling behind on your payments, which can lead to late fees and negatively impact your credit.
Just keep in mind that going with a longer term can also have drawbacks, as it can lead to higher overall costs (more on that below).
You Might Be Able to Access Quick Cash
Some lenders offer cash-out auto refinance loans using your car’s equity (the value of your car minus the amount you owe on it). On top of the new loan that pays off your current one, you receive a lump sum of cash based on your equity. For example, if your car is worth $15,000 and you have $8,000 left on your loan, you might get a refinance loan for $11,000 and take $3,000 in cash. You’ll pay interest on the full amount, and cash-out refis come with some risks. As a result, you generally only want to consider this option for financial emergencies or to pay off high-interest debt.
You Can Change Your Loan Terms
Refinancing may allow you to switch from a variable interest rate to a fixed rate, offering more stability and predictability. It can also give you an opportunity to modify your loan term to better suit your financial circumstances. For example, if your income has increased, or monthly expenses have decreased, since you took out the original loan, you might be able to refinance for a shorter term and pay off your loan earlier than you originally planned.
You Can Remove a Cosigner
If your initial auto loan required a cosigner, refinancing can allow you to remove them once your financial situation improves. This can simplify your financial obligations and release your cosigner from sharing responsibility for your auto loan.
Cons of Refinancing a Car Loan
If you are debating whether to refinance your car loan, you’ll also want to keep these potential downsides in mind.
You Could Pay More in Interest
If you refinance to a longer loan term to lower your monthly payment, you’ll likely end up paying more in interest over the life of the loan. Even scoring a lower interest rate may not make up for the additional months of interest you’ll pay. While the short-term relief may be helpful, it may not be worth the added cost.
Refinancing Comes With Fees
Refinancing is generally not free. Your new lender may charge an application or origination fee, and your current lender may charge a penalty for paying off your loan early. In addition, your state may charge a fee to re-register your car or transfer the title after refinancing. These fees can diminish or eliminate the potential savings of refinancing.
You Could End Up Upside Down
Refinancing to extend the term of your car loan, or cash out equity, could put you in a position of owing more than what your car is worth. This is known as negative equity, or being upside-down on a loan. This can be problematic if you need to sell the car or if it’s totaled in an accident
For example, if you want to trade in or sell your vehicle, you’ll need to cover the difference between what the buyer/dealer pays and what you owe your lender before you can transfer the title. And if your car is totaled, your insurance agency will pay out the value of your vehicle. However, you’ll still owe the full amount of the loan (a higher amount) to your lender.
It Can Impact Your Credit Score
Refinancing triggers a hard credit inquiry, which will appear on your credit reports and can temporarily lower your credit score. While the impact is usually minor and short-lived, it’s important to consider if you’re planning other financial moves, like getting a mortgage or personal loan, in the near future.
Limited Savings for Older Loans
Generally, if you have less than 24 months remaining on your car loan, the potential savings from refinancing may not justify the effort and cost. You typically pay the most interest in the first few years of the loan, which limits the benefit of refinancing toward the end of the repayment period.
Alternatives to Car Refinancing
If refinancing doesn’t align with your financial goals, there are other ways to manage your car-related debt.
Balance-Transfer Credit Card
If your lender allows it, you may be able to transfer your auto debt to a balance-transfer credit card. If you can qualify for a transfer card with a 0% introductory rate and pay off the balance within the promotional timeframe (typically 12 to 21 months), you could save significantly on interest. You might even earn rewards from your new credit card in the process.
However, balance transfers often come with fees, usually 3% to 5% of the transferred amount. And if you fail to pay off the balance before the promotional period ends, the interest rate can jump, potentially costing you more than your original loan. This option generally works best for small loan balances and disciplined borrowers.
Personal Loan
A personal loan can be used for a variety of expenses, including paying off your car loan. These loans often come with fixed interest rates and predictable payment schedules, making them a possible alternative to auto refinancing. Going this route also gives you the option of applying for more than you need to pay off the car loan and use any additional cash you borrow for other expenses.
However, personal loans often have higher interest rates than auto loans, particularly for borrowers with average or below-average credit scores. Before opting for a personal loan, you’ll want to compare rates and calculate whether this approach would save you money compared to your existing loan.
Car refinancing can be a smart financial move under the right circumstances, such as securing a lower interest rate or reducing your monthly payments. However, it’s not without potential downsides, including fees, extended loan terms, and the risk of negative equity.
If refinancing doesn’t seem like the best fit for your situation, alternatives like balance transfer credit cards or personal loans may offer other ways to manage your car loan or give you more financial flexibility.
Why consider a SoFi Personal Loan? SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
What are the advantages of refinancing your car?
Refinancing your car offers several advantages, such as lowering your interest rate, which reduces the total cost of the loan. It can also decrease your monthly payments by extending the loan term, improving your cash flow. In addition, refinancing provides an opportunity to change your loan terms, like switching from a variable to a fixed interest rate, or removing a cosigner from the loan. However, refinancing also comes with costs and risks, so you’ll want to weigh the pros and cons before you proceed.
When should you refinance a car loan?
You might look into refinancing your car loan when interest rates have dropped, your credit score has improved, or you need to lower your monthly payments. Refinancing can also be a good option if you want to adjust your loan terms for more stability, such as moving from a variable to a fixed interest rate. However, it’s important to consider potential fees and ensure the savings outweigh the costs before you proceed.
How soon can you refinance your car loan after purchase?
You can refinance your car loan as early as a few months after purchase, but it can be a good idea to wait at least six months to a year. This timeframe allows your credit score to recover from any temporary drop (due to the original lender’s hard credit inquiry). This also gives you time to establish consistent payments on the loan and shows potential refinance lenders that you are a responsible borrower. Also, some lenders require six to 12 months of on-time payments to even consider a refinancing application.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
