Financial Topics Archives

Dec

2025

How to Leverage Home Equity to Pay Off Student Debt

By Becca Stanek | Family Finances, Home Ownership, Student Loans, student_loan | No Comments

If you’re finding your student loan debt difficult to manage, one option for tackling it is to leverage your home equity. It’s possible to do this through the student loan cash-out refinance program offered by Fannie Mae or through a general cash-out refinance.

Either option would allow you to use the excess value of your home to pay off student loan debt directly. Plus, because you would be consolidating your student loan debt into your mortgage, you’d have to make just one payment each month. You might also secure a lower interest rate than you had on your student loans.

Still, there are major downsides to consider before paying off student loans with home equity. For one, the student loan debt won’t actually go away — you’ll still owe that money. Additionally, you could lose access to student loan benefits and protections. And, if you aren’t able to stay on top of monthly payments, your home is on the line.

Key Points

• Leveraging home equity can consolidate student loans into a mortgage, potentially lowering interest rates and simplifying payments.

• Options include a student loan cash-out refinance or a home equity line of credit (HELOC).

• Risks involve losing student loan benefits, potential foreclosure, and debt becoming part of the mortgage.

• Consider credit score requirements and gather necessary documents before applying for refinancing.

• Weigh pros and cons, including interest rates, loan terms, and potential fees, before deciding.

Using a Student Loan Cash-Out Refinance to Pay Off Student Loans

With a cash-out refinance, you take out a new mortgage for an amount that exceeds what you currently owe. You then get the difference in cash, which you could then use to pay off your student loan debt.

One option for doing this is through Fannie Mae’s Student Loan Cash-out Refinance program, which is specifically designed to allow homeowners to use their home equity to pay off student loans. To qualify, borrowers must use the funds from the cash-out refinance to fully pay off at least one of their student loans. Additionally, it’s stipulated that this loan must belong to the individual who applied for the refinance.

For borrowers who don’t qualify for the Fannie Mae program, or who want to use their cash for costs other than student loan repayment, it’s also possible to get a general cash-out refinance through another lender.

Whether you go with Fannie Mae or another lender, there are typically certain requirements that a borrower must meet to qualify for a cash-out refinance. Generally, there are stipulations for credit score, debt-to-income ratio, and the amount of equity in the home after closing. As such, it’s helpful to determine before applying how much equity you have in your home.

Recommended: First-Time Homebuyer Guide

Should I Tap Into My Home Equity to Pay Off Student Loans?

Using the equity you’ve earned in your home to pay off your student loans may sound like an easy fix. But before you commit to refinancing, you’ll want to weigh the decision carefully. While it may make sense for some, a student loan cash-out refinance won’t work for everyone. Here are a few pros and cons to consider as you make your decision.

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Benefits of Paying Off Student Loans with Home Equity

Like most financial decisions, paying off your student loans with the equity you’ve earned on your home is a multifaceted decision. Here are some of the ways you could find it beneficial:

• You may be able to get a better rate. Securing a lower interest rate is potentially the most appealing reason to use the equity in your home to pay off student loans. As part of your decision-making process, consider reviewing mortgage options at a few different lenders. While reviewing rate quotes from each lender, do the math to determine if paying off student loans with home equity will truly reduce the amount of money you spend in interest. If there are any fees or prepayment penalties, make sure to factor those in. Keep in mind this isn’t the only way to get a better rate either — another option to explore is student loan refinancing.

• You may get more time to pay off your loan. When making your decision, also take into account the length of the mortgage term. The standard repayment plan for student loans is a 10-year term, unless you have already consolidated them, in which case you could have a term of up to 25 years. With a mortgage, term lengths can be as long as 30 years. Just keep in mind that while repaying your debt over a longer time period could lower monthly payments, it may also mean you pay more in interest over the life of the loan.

• You can streamline your payments. Another benefit is reducing the number of monthly payments you need to keep track of. Instead of paying your mortgage and each of your student loans, those bills will get consolidated into a single payment. Streamlining your payments could help you stay on top of your payments and make your finances a little bit easier to manage.

Recommended: Home Affordability Calculator

Downsides of Paying Off Student Loans with Home Equity

There are a few potential negatives that could impact your decision to pay off student loans with your home equity:

• You risk foreclosure. Using your home equity to pay off your student loans could potentially put your home at risk. That’s because you’re combining your student loans and mortgage into one debt, now all tied to your home. That means if you run into any financial issues in the future and are unable to make payments, in severe cases, such as loan default, your home could be foreclosed on.

• Your student debt won’t really disappear. When you use your home equity to pay off your student loans, you’ll still owe that debt. Only now, it’s part of your mortgage.

• You’ll lose access to student loan benefits and protections. When you do a student loan cash-out refinance, you’ll no longer be eligible for borrower protections that are afforded to borrowers who have federal loans. These benefits include deferment or forbearance, as well as income-driven repayment plans. If you’re pursuing student loan forgiveness through one of the programs available to federal borrowers, such as Public Service Loan Forgiveness, consolidating your student loan debt with your mortgage would eliminate you from the program. As such, it may not make sense to use the equity in your home to pay off your student loans if you’re currently taking advantage of any of these options.

• You could owe more than your home is worth. As you weigh your options, consider comparing the available equity in your home to the amount you owe in student loans. In some cases, you may owe more in student loan debt than you have available to use in home equity under the various loan guidelines. If you end up owing more than what your home is worth, that could make it tough to sell your home, as you’d need to add your own funds to repay your loan balance.

When It’s Time to Leverage Your Home Equity

Cashing in on your home equity isn’t as easy as withdrawing money from your checking account, but it’s also not as difficult as you might think. A good first step is to contact a mortgage lender, who will order an appraisal of your home and help you to get started on the paperwork.

This is also a good time to explore another way to leverage home equity to pay bills: a home equity line of credit (HELOC). When you take out a HELOC, you can borrow (and pay interest on) only as much as you need at a given time, up to a preapproved credit limit. A HELOC monthly payment calculator can be a useful tool as it will help you understand what monthly payments might look like if you follow this path. If you have a great rate on your existing mortgage and don’t want to refinance into a higher rate, a HELOC might be a good alternative.

It could also be a good idea to check your credit score. To secure a cash-out refinance, many lenders will likely require a credit score of 620 or higher. That being said, the minimum score required depends on many factors, such as credit, income, equity, and more. If you don’t meet the minimum FICO score requirement for your chosen program, you might want to try to improve your credit score before applying.

At the very least, you’ll likely need to gather necessary documents so you have them handy. Get together your latest tax filings, pay stubs, and bank statements. Lenders use those documents to evaluate whether you have the savings and cash flow to pay back a fatter mortgage, and they may ask for when you apply to refinance.

The Takeaway

When used responsibly, home equity can be a useful tool in helping to improve your overall financial situation — including using home equity to pay off student loans. While there could be upsides, such as streamlining payments and securing a better rate, it’s important to also weigh the drawbacks, like losing access to student loan protections and putting your home on the line. Depending on how much you owe on your student loans, a cash-out refi or a home equity line of credit (HELOC) might be a good way to settle some or all of your student loan debt and even consolidate multiple loans into one payment.

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FAQ

Is it smart to use home equity to consolidate debt?

It can be. If you can obtain a lower interest rate on a home equity loan, home equity line of credit (HELOC), or even a cash-out refinance, it could make sense to consolidate debt this way. And if you have multiple types of debt (student loan debt, credit card debt, for example), it might simplify things to have one monthly payment. But it does mean you would lose access to student loan forgiveness and forbearance benefits, and securing debt with your home does involve risk.

Is it a good idea to take out a home equity loan to pay for college?

While you can pay for college with a home equity loan, it might be better to find a student loan for that expense because if you are unable to make payments on your home equity loan, your property could be at risk.

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Dec

2025

Guide to IRA Contribution Deadlines

By Rebecca Lake | invest, Investing, Preparing for Retirement | Comments Off

Fortunately for retirement savers, the IRS allows some flexibility in funding traditional or Roth IRAs. You have until tax day of the following year to make contributions.

In other words: Your last day to make an IRA contribution for tax year 2025 is April 15, 2026. If you file an extension on your return, your ability to contribute to an IRA is not extended, however.

Knowing how long you have to make an IRA contribution is important, as it can help you save a little more, and potentially reap some tax benefits.

What Is the IRA Contribution Deadline?

A conventional tax year extends from January 1 of the year through December 31 (corporate tax years can be different). However, the deadline for individuals making the maximum annual IRA contribution doesn’t follow that timeline; generally you have until tax day in April of the following year.

In most years, the deadline for filing your tax return is April 15. However, if the 15th falls on a holiday or weekend, the deadline is generally pushed to the next business day.

The deadline also applies to both annual contributions and catch-up contributions for regular IRAs. A catch-up contribution of $1,000 is allowed for taxpayers aged 50 or older.

Again, if you file an extension on your tax return, that will not give you extra time to contribute to an ordinary IRA. That said, the rules related to contribution deadlines and extensions are somewhat different for other types of IRAs, like SEP and SIMPLE IRAs designed for those who are self-employed or own small businesses. (see below).

Traditional, Roth, SEP, and SIMPLE IRA Contribution Deadlines for 2025

Contributions limits and deadlines vary, depending on the type of IRA you have.

IRA Type	2024 Annual Contribution Limit	Contribution Deadline for the 2025 Tax Year
Traditional IRA	$7,000, or $8,000 if you’re 50 or older	April 15, 2026
Roth IRA	$7,000, or $8,000 if you’re 50 or older	April 15, 2026
SEP IRA	25% of compensation or $70,000, whichever is less (SEP plans do not have catch-up provisions)	April 15, 2026, unless the employer filed an extension; the extension deadline is Oct. 15, 2026
SIMPLE IRA	Basic limit is $16,500; $20,000 if you’re 50 to 59 or age 64 and older, and $21,750 if your age 60 to 63	January 30, 2026 for employee contributions; April 15, 2026 for employer contributions (or Oct. 15, 2026, if there’s an extension)

How IRA Contributions Work

Contributions refer to the funds you deposit in a retirement account like an IRA (but also a 401(k) or 403(b)). Most retirement accounts have rules that govern the maximum amount you can contribute per year and the tax implications for contributing to one type of account vs. another.

• Generally speaking, traditional IRAs, as well as SEP and SIMPLE IRAs, are considered tax-deferred accounts. That means your contributions are typically tax deductible in the year you make them (though some restrictions apply if you or your spouse is covered by a workplace retirement account). But you will owe taxes on withdrawals.

• The money you contribute to a Roth IRA is an after-tax contribution, and is not tax deductible. Qualified withdrawals after age 59 ½ are tax-free, however.

Roth accounts have more restrictions than other types of IRAs. One important distinction is the income cap: For tax year 2025: Single filers whose modified adjusted gross income (MAGI) is $165,000 or higher, and those who are married, filing jointly with a MAGI of $246,000 or higher, are not eligible to open a Roth IRA.

Other Types of IRAs

In addition to the ordinary traditional and Roth IRA options, self-employed people, sole proprietors, and those with small businesses can set up SEP or SIMPLE IRAs.

• A SEP IRA, or Simplified Employee Pension IRA, is a retirement plan that can be set up by employers, sole proprietors, or the self-employed. Employers make contributions for employees (employees don’t contribute). Employers are not required to contribute to a SEP every year.

• A SIMPLE IRA, or Savings Incentive Match Plan for Employees IRA, is similar to a 401(k) but for businesses with 100 or employees or less. Both the employer and the employees can contribute to a SIMPLE IRA.

Both SEP and SIMPLE IRAs are tax-deferred accounts, similar to a traditional IRA. Contributions in most cases are tax deductible, but the account holder must pay ordinary income tax on withdrawals. The rules and restrictions governing withdrawals vary, so you may want to check the details at IRS.gov or consult a tax professional.

Pros and Cons of Maxing Out Your IRA Early or Late

Maxing out your IRA, i.e., making the full annual contribution allowed, could help you save more for retirement. And as with any contribution amount, there can be tax benefits depending on the type of IRA you’re funding.

Whether it makes sense to contribute earlier in the year or wait until the contribution deadline depends on your financial situation.

Here are some of the advantages and disadvantages of maxing out an IRA earlier vs. later.

	Maxing Out an IRA Early	Maxing Out an IRA Late
Pros	• Maxing out your plan sooner allows it more time to grow, potentially. Growth depends on the investments you choose for your IRA; there are no guarantees of returns and there is always a risk of loss. • If your financial situation changes you’ll have the reassurance of knowing that your plan is fully funded for the year.	• Waiting to max out your IRA until tax day could give you more time to max out your 401(k) before the year-end contribution deadline. • If you have a Roth IRA, waiting to make contributions can help you better gauge the maximum amount you can save, based on your income.
Cons	• Fully funding an IRA early in the year could leave you short financially if you need money for other goals. • There’s a risk of contributing too much to a Roth IRA, based on what your income and filing status allows, which could trigger a tax penalty.	• Delaying contributions might mean missing out on potential growth (but there are no guarantees your money will grow). • Waiting too long could result in missing the annual contribution deadline altogether if you come up short and don’t have enough money to save.

Maxing Out an IRA Early

Maxing Out an IRA Late

Pros

• Maxing out your plan sooner allows it more time to grow, potentially. Growth depends on the investments you choose for your IRA; there are no guarantees of returns and there is always a risk of loss.

• If your financial situation changes you’ll have the reassurance of knowing that your plan is fully funded for the year.

• Waiting to max out your IRA until tax day could give you more time to max out your 401(k) before the year-end contribution deadline.

• If you have a Roth IRA, waiting to make contributions can help you better gauge the maximum amount you can save, based on your income.

Cons

• Fully funding an IRA early in the year could leave you short financially if you need money for other goals.

• There’s a risk of contributing too much to a Roth IRA, based on what your income and filing status allows, which could trigger a tax penalty.

• Delaying contributions might mean missing out on potential growth (but there are no guarantees your money will grow).

• Waiting too long could result in missing the annual contribution deadline altogether if you come up short and don’t have enough money to save.

What If You Contribute Too Much to Your IRA?

If you contribute too much money to your IRA, the IRS can treat it as an excess contribution. Excess IRA contributions can happen if you:

• Aren’t keeping track of contributions throughout the year

• Miscalculate the amount you can contribute to a Roth IRA, based on your income and filing status

• Make an improper rollover contribution

If you make excess IRA contributions, the IRS can apply a 6% penalty for each year the excess amounts remain in your account. You can avoid the 6% tax by withdrawing excess contributions and any earnings from those contributions by the tax filing deadline or extension deadline if you filed one.

The Takeaway

If you have any type of IRA, it’s important to mark your calendar each year with the contribution deadline so that you can plan the cadence of your contributions in relation to other expenses. Because most types of IRAs allow additional time for contributions, this can help you save more — and possibly reap additional tax benefits.

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FAQ

What is the last day to contribute to an IRA for tax year 2025?

The traditional and Roth IRA contribution deadline for the 2025 tax year is April 15, 2026. If you’re an employer, or self-employed individual contributing to an SEP IRA, you’d have until tax day to contribute, unless you filed a tax extension. In that case, you’d be able to use the extension deadline instead.

Can I contribute to an IRA after December 31?

Yes, you can contribute to an IRA for the current tax year up until the federal tax deadline, which is typically April 15 of the following year. In years where the federal tax deadline falls on a holiday or weekend, the date is pushed up to the next business day.

Can I open an IRA in 2026, but contribute for 2025?

Yes, you can open a new IRA in 2026 and still make a contribution for the 2025 tax year. However, you must both open the account and fund it with your 2025 contribution by the April 15, 2026 tax deadline. Contributions made after April 15, 2026, can only be for the 2026 tax year and must be made by the tax deadline in 2027.

About the author

Rebecca Lake

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

Photo credit: iStock/MicroStockHub

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Dec

2025

SEP IRA vs SIMPLE IRA: Differences & Pros and Cons

By Laurel Tincher | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

One of the most common retirement plans is an IRA, or individual retirement account, which allows individuals to contribute and save money for retirement over time. The money can be withdrawn during retirement to cover living expenses and other costs.

There are several different types of IRAs. Two of the most popular types are the Roth IRA and the Traditional IRA.

Perhaps less well-known are the SEP IRA and the SIMPLE IRA. These IRAs are designed for business owners, sole proprietors, and the self-employed.

For small business owners who would like to offer their employees — and themselves — a retirement savings plan, a SEP IRA and a Simple IRA can be options to explore. According to a 2023 study by Fidelity, only 34% of small business owners offer their employees a retirement plan. This is because they believe they can’t afford to do so (48%), are too busy running their company to do it (22%), or don’t know how to start (21%). SEP or Simple IRAs are generally easy to set up and manage and have lower fees than other types of accounts.

There are a number of similarities and differences between the SEP IRA vs. the SIMPLE IRA. Exploring the pros and cons of each and comparing the two plans can help self-employed people, small business owners, and also employees make informed decisions about retirement savings.

How SEP IRAs Work

A SEP IRA, or Simplified Employee Pension IRA, is a retirement plan set up by employers, sole proprietors, and the self-employed. Although SEP IRAs can be used by any size business, they are geared towards sole proprietors and small business owners. SEP IRAs are typically easy to set up and have lower management fees than other types of retirement accounts.

Employers make contributions to the plan for their employees. They are not required to contribute to a SEP every year. This flexibility can be beneficial for businesses with fluctuating income because the employer can decide when and how much to contribute to the account.

Employers can contribute up to 25% of an employee’s annual salary or $70,000 in 2025, whichever is less. In 2026, employers can contribute up to $72,000 or 25% of an employee’s salary, whichever is less. The employer and all employees must receive the same rate of contribution.

Employees cannot make contributions to their SEP accounts.

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SEP IRA Pros and Cons

There are advantages to a SEP IRA, but there are disadvantages as well. Here are some of the main benefits and drawbacks to be aware of.

Pros

The pros of a SEP IRA include:

• A SEP IRA is an easy way for a small business owner or self-employed individual to set up a retirement plan.

• The contribution limit is higher than that for a SIMPLE IRA. In 2025, the contribution limit is $70,000 to a SEP IRA, and in 2026, the contribution limit is $72,000.

• Employers can deduct contributions to the account from their taxes up to certain amounts, and employees don’t have to include the contributions in their gross income. The money in the account is tax-deferred, and employees don’t pay taxes on the money until it gets withdrawn.

• For self-employed individuals, a SEP IRA may help reduce certain taxes, such as self-employment tax.

• An employer isn’t required to make contributions to a SEP IRA every year. This can be helpful if their business has a bad year, for example.

• For employees, the money in a SEP is immediately 100% vested, and each employee manages their own assets and investments.

• Having a SEP IRA does not restrict an individual from having other types of IRAs.

Cons

There are some drawbacks to a SEP IRA for employees and employers. These include:

• Employees are not able to make contributions to their own SEP accounts.

• Individuals cannot choose to pay taxes on the contributions in their SEP now, even if they’d like to.

• Employers must contribute the same percentage to all employees’ SEP accounts that they contribute to their own account.

• There are no catch-up contributions for those 50 and older.

How SIMPLE IRAs Work

SIMPLE IRAs, or Savings Incentive Match Plan for Employees Individual Retirement Accounts, are set up for businesses with 100 or fewer employees. Unlike the SEP IRA, both the employer and the employees can contribute to a SIMPLE IRA.

Any employee who earns more than $5,000 per year (and has done so for any two- year period prior to the current year) is eligible to participate in a SIMPLE IRA plan. Employees contribute pre-tax dollars to their plan — and they may have the funds automatically deducted from their paychecks.

Employers are required to contribute to employee SIMPLE IRAs, and they may do so in one of two ways. They can either match employee contributions up to 3% of the employee’s annual salary, or they can make non-elective contributions whether the employee contributes or not. If they choose the second option, the employer must contribute a flat rate of 2% of the employee’s salary up to a limit of $350,000 in 2025, and up to a limit of $360,000 in 2026.

Both employer contributions and employee salary deferral contributions are tax-deductible.

As of 2025, the annual contribution limit to SIMPLE IRAs is $16,500. Workers age 50 and up can contribute an additional $3,500. In 2026, the annual contribution limit is $17,000, and workers age 50 and up can contribute an additional $4,000.

SIMPLE IRA Pros and Cons

There are benefits and drawbacks to a SIMPLE IRA.

Pros

These are some of the pros of a SIMPLE IRA:

• A SIMPLE IRA is a way to save for retirement for yourself and your employees. And the plan is typically easy to set up.

• Both employees and employers can make contributions.

• Money contributed to a SIMPLE IRA may grow tax-deferred until an individual withdraws it in retirement.

• For employees, SIMPLE IRA contributions can be deducted directly from their paychecks.

• Employers can choose one of two ways to contribute to employees’ plans — by either matching employee contributions up to 3% of the employee’s annual salary, or making non-elective contributions of 2% of the employee’s salary up to an annual compensation limit.

• Employees are immediately 100% vested in the SIMPLE IRA plan.

• A SIMPLE IRA has higher contribution limits compared to a traditional or Roth IRA.

• Catch-up contributions are allowed for those 50 and up.

Cons

SIMPLE IRAs also have some drawbacks, including:

• A SIMPLE IRA is only for companies with 100 employees or fewer.

• Employers are required to fund employees’ accounts.

• The SIMPLE IRA contribution limit ($16,500 in 2025, and $17,000 in 2026) is much lower than the SEP IRA contribution limit ($70,000 in 2025, and $72,000 in 2026).

Main Differences Between SEP and Simple IRAs

While SEP IRAs and SIMPLE IRAs share many similarities, there are some important differences between them that both employers and employees should be aware of.

Eligibility

On the employer side, a business of any size is eligible for a SEP IRA. However, SIMPLE IRAs are for businesses with no more than 100 employees.

For employees to be eligible to participate in a SIMPLE IRA, they must earn $5,000 or more annually and have done so for at least two years previously. To be eligible for a SEP IRA, an employee must have worked for the employer for at least three of the last five years and earned at least $750.

Who Can Contribute

Only employers may contribute to a SEP IRA. Employees cannot contribute to this plan.

Both employers and employees can contribute to a SIMPLE IRA. Employers are required to contribute to their employees’ plans.

Contribution limits

Employers are required to contribute to employee SIMPLE IRAs either by matching employee contributions up to 3% of the employee’s annual salary, or making non-elective contributions of 2% of the employee’s salary up to a limit of $350,000 in 2025, and up to a limit of $360,000 in 2026.

With a SEP IRA, employers can contribute up to 25% of an employee’s annual salary or $70,000 in 2025, whichever is less. In 2026, an employer can contribute up to 25% of an employee’s annual salary or $72,000, whiever is less. A business owner and all employees must receive the same rate of contribution. Employers are not required to contribute to A SEP plan every year.

Taxes

For both SEP IRAS and SIMPLE IRAs, contributions are tax deductible. Individuals typically pay taxes on the money when they withdraw it from the plan.

Vesting

All participants in SIMPLE IRAs and SEP IRAS are immediately 100% vested in the plan.

Paycheck Deductions

Employees contributing to a SIMPLE IRA can have their contributions automatically deducted from their paychecks.

Employees cannot contribute to a SEP IRA, thus there are no paycheck deductions.

Withdrawals

For both SEP IRAs and SIMPLE IRAS, participants may withdraw the money penalty-free at age 59 ½ . Withdrawals are taxable in the year they are taken.

If an individual makes an early withdrawal from a SEP IRA or a SIMPLE IRA, they will generally be subject to a 10% penalty. For a SIMPLE IRA, if the withdrawal is taken within the first two years of participation in the plan, the penalty is raised to 25%.

SEP IRAs may be rolled over into other IRAs or certain other retirement plans without penalty. SIMPLE IRAs are eligible for rollovers into other IRAs without penalty after two years of participation in the plan. Before then, they may only be rolled over into another SIMPLE IRA.

Here’s an at-a-glance comparison of a SEP IRA vs. SIMPLE IRA:

	SEP IRA	SIMPLE IRA
Eligibility	Businesses of any size Employee must have worked for the employer for at least three of the last five years and earn at least $750 annually	Business must have no more than than 100 employees Employees must earn $5,000 or more per year and have done so for two years prior to the current year
Who can contribute	Employers only	Employers and employees (employers are required to contribute to their employees’ plans)
Contribution limits	Employers can contribute up to 25% of an employee’s annual salary or $70,000 in 2025, and up to $72,000 in 2026, whichever is less No catch-up contributions	$16,500 per year in 2025, and $17,000 in 2026 Catch-up contributions of $3,500 for those 50 and up in 2025 and $4,000 for those 50 and up in 2026
Taxes	Contributions are tax deductible. Taxes are paid when the money is withdrawn	Contributions are tax deductible. Taxes are paid when the money is withdrawn
Vesting	100% immediate vesting	100% immediate vesting
Paycheck deductions	No (employees cannot contribute to the plan)	Yes
Withdrawals	Money can be withdrawn without penalty at age 59 ½. There is generally a 10% penalty if money is withdrawn early, before age 59 ½	Money can be withdrawn without penalty at age 59 ½. There is generally a 10% penalty if money is withdrawn early, before age 59 ½ (or 25% if the account has been open for less than 2 years)

The Takeaway

Both the SEP IRA and the SIMPLE IRA were created to help small business owners and their employees save for retirement. Each account may benefit employers and employees in different ways.

With the SEP IRA, the employer (including a self-employed person) contributes to the plan. They are not required to contribute every year. With the SIMPLE IRA, the employer is required to contribute, and the employee may contribute but can choose not to.

In addition to these plans, there are other ways to save for retirement. For instance, individuals can contribute to their own personal retirement plans, such as a traditional or Roth IRA, to help save money for their golden years. Just be sure to be aware of the contribution limits.

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.

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.

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

Dec

2025

What to Do About Excess Contributions to a Roth IRA

By Rebecca Lake | Financial Topics, Preparing for Retirement | Comments Off

If you contribute more than the annual allowable limit to a Roth IRA given your income and tax filing status, you need to withdraw the excess amount or face a 6% penalty.

The good news is that it’s possible to withdraw or transfer excess IRA contributions. Knowing how to fix this mistake — and how to best plan yearly contributions — can help you to avoid an excess IRA contribution penalty going forward.

Note that the rules are generally the same for excess contributions to a traditional IRA or to a Roth IRA.

Key Points

• Excess contributions to a Roth IRA incur a 6% penalty each year they remain in your account.

• You can withdraw excess contributions before the tax filing deadline (or extension deadline) to avoid penalties.

• Report excess IRA contributions on IRS Form 5329, which you include with your Form 1040 when you file your return or an extension.

• If you don’t wish to withdraw excess contributions, you may be able to recharacterize — or shift them — to another type of IRA before the deadline.

• You may also be able to apply excess contributions to future years within the allowed limits to avoid penalties.

Maximum Annual Roth IRA Contributions

If you don’t know what a Roth IRA is, it’s a tax-advantaged individual retirement account. Contributions to a Roth are made with after-tax dollars, and qualified withdrawals from a Roth IRA are tax-free, which can make them attractive for people who expect to be in a higher tax bracket when they retire — or who want a tax-free income source later in life.

You can contribute to both a Roth IRA and a workplace retirement plan like a 401(k), at the same time, as long as you observe the contribution limits for each type of account, and as long as you qualify for a Roth IRA.

Whether you’re eligible to contribute to a Roth IRA depends on your tax filing status and income (see chart below). Roth IRA contribution limits are set by the IRS and adjusted periodically for inflation.

The contribution limit for a Roth IRA in 2025 is $7,000 per year, while those 50 and up can contribute up to $8,000 per year. In 2026, the contribution limited is $7,500, and those 50 and up can contribute up to $8,600. These annual limits are the same, whether you’re saving in a traditional IRA vs. Roth IRA, and these are total amounts across all IRA accounts.

Here’s how Roth IRA income limits and contribution rules work for 2025 and 2026.

Filing Status	2025: If your Modified Adjusted Gross Income (MAGI) is …	2026: If your Modified Adjusted Gross Income (MAGI) is …	You can contribute…
Married filing jointly or qualifying widow(er)	< $236,000	≥ $242,000 and < $252,000	Up to a maximum of $7,000 per year ($8,000 for those 50 and older) in 2025; up to $7,500 ($8,600 for those 50 and up in 2026).
Married filing jointly or qualifying widow(er)	≥ $236,000 and < $246,000	≥ $246,000 and < $252,000	a reduced amount
Married filing jointly or qualifying widow(er)	≥ $246,000	≥ $252,000	Not eligible to contribute to a Roth
Married filing separately and you lived with your spouse at any time during the year	< $10,000	< $10,000	a reduced amount
Married filing separately and you lived with your spouse at any time during the year	≥ $10,000	≥ $10,000	Not eligible
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year	< $150,000	< $153,000	up to the limit
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year	≥ $150,000 and < $165,000	≥ $153,000 and < $168,000	a reduced amount
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year	≥ $165,000	≥ $168,000	Not eligible

What Happens If You Contribute Too Much to a Roth IRA?

Opening an IRA can get help you save for retirement. The downside is that contributing too much money to a Roth IRA (or traditional IRA) can result in a tax penalty. An excess contribution to an IRA can happen when:

• You contribute more than the annual contribution limit because you have multiple IRAs.

• You make an improper rollover contribution.

• You inadvertently contribute more than the amount allowed for your income and filing status.

• You made a contribution early in the year, but you ended up earning more than anticipated, which changed the amount you would be allowed to contribute.

Excess IRA contributions are subject to a 6% penalty each year that they remain in your account. Per the IRS: “The tax can’t be more than 6% of the combined value of all your IRAs as of the end of the tax year.”

If you’ve contributed too much to your Roth IRA, there are some steps you can take to rectify this mistake.

How Do You Report Excess Roth IRA Contributions?

Excess IRA contributions are reported on IRS Form 5329. You’ll include this form with your Form 1040 when you file your return or an extension.

This form allows the IRS to calculate how much of a tax penalty you’ll owe if you don’t take steps to correct an excess Roth IRA contribution.

Can You Withdraw Excess Roth IRA Contributions?

If you realize that you contributed too much before you file your tax return, you can avoid the tax penalty by withdrawing the excess Roth IRA contribution by the tax filing deadline, or by the extension deadline. Any excess amounts withdrawn before the tax filing or extension deadline, would not be subject to the 6% penalty.

That said: If those excess contributions generated investment gains while in your IRA account, you’d have to withdraw the gains as well. And you would have to report them as income.

However, as of Dec. 29, 2022, a “corrective distribution” — meaning, a withdrawal of the gains on an excess contribution — is no longer subject to a 10% early withdrawal penalty.

You can contact your IRA custodian (the bank that holds your IRA account) if you’re not sure how to withdraw excess amounts. Keep in mind that you’ll need to withdraw the excess contribution amount as well as any earnings those contributions generated.

You may owe tax on the earnings from the excess contribution amount (see below for possible ways to avoid this). There are no guarantees that a Roth contribution would see a gain, however; if there is a net loss, you could still withdraw the remainder of your contribution, minus the loss.

If you’ve already filed your taxes, you have up to six months — usually until October 15 of the same year — to amend your return and make the necessary withdrawals.

Recharacterizing Excess Roth IRA Contributions

Recharacterizing IRA contributions allows you to move assets deposited in one IRA to a second IRA, and treat that money as if it had originally been contributed to the second IRA.

If you have excess contributions because you contributed more than was allowed based on your income and filing status, recharacterization could allow you to avoid a tax penalty. You would transfer the excess contribution from one IRA to the second IRA by the tax-filing or extension deadline, doing a direct transfer within the same institution, or a trustee-to-trustee transfer to an IRA at another bank (not a withdrawal, which could be subject to additional taxes and/or a penalty).

For example: If you made excess contributions to an IRA for tax year 2024, you have until April 15, 2025 to recharacterize the excess contribution and earnings (or net loss); or until the extension deadline in October.

If you made excess contributions in prior years, you couldn’t recharacterize these, as the window for recharacterization would have passed, and you’d likely owe a penalty.

In order to complete a recharacterization of the excess funds, you must take the following steps:

• Include any earnings specific to the excess amount. If there was a loss attributable to that contribution, you would note a negative amount.

• Be sure to report the recharacterization on your tax return for the year in which you made the original excess contribution.

• Use the date of the excess contribution to the first IRA as the date the contribution is made to the second IRA.

Applying Excess Contributions to the Following Year

The IRS also allows you to carry excess Roth IRA contributions forward. You can apply excess contributions to your annual contribution limit for future years.

Again, the contributions you carry forward must be within your allowed limit for that following year. Be sure to check, so as not to create excess contributions in a subsequent year.

Penalties for Excess Roth IRA Contributions

As mentioned, the IRS imposes a penalty on excess Roth IRA contributions in the form of a 6% tax, as of 2024. It applies each year that excess Roth IRA contributions remain in your account.

Keep in mind that you might also owe ordinary income tax on any earnings on that contribution amount as well.

When Are Excess Contributions Penalized?

Excess Roth IRA contributions are penalized when they’re not corrected. The IRS will continue to penalize you for each year that you allow the excess contributions to remain in your IRA. That rule goes for both Roth and traditional IRA contributions.

Again, if you haven’t filed your tax return yet, the simplest way to correct them and avoid the penalty is to withdraw the excess amounts, plus any gains. As long as you do that by the tax-filing deadline or extension deadline, then the IRS doesn’t consider those amounts to be excess contributions.

How to Avoid Excess IRA Contributions

Avoiding excess IRA contributions is possible if you understand how much you’re able to contribute each year, then planning your contributions accordingly. With Roth IRA contributions, your contribution amount will depend on your tax filing status and modified AGI for the tax year.

You can use a tax calculator to estimate your modified AGI and use that to plan your contributions. Remember that you have until the April tax-filing deadline to make IRA contributions for the current tax year.

The extra few months allow you time to prepare your return and make your contributions — or withdraw them if necessary — to stay within your annual contribution limit.

Calculating Excess Contributions

While you have until tax day in April of the following year to contribute to a Roth IRA for the current tax year, the income you use to determine the amount of your allowable Roth contribution is based only on the current tax year, which ends on December 31.

Example: To determine whether your modified AGI is within allowable Roth IRA limits for 2025, you would calculate your compensation from Jan. 1 to Dec. 31, 2025.

If you’re married, filing jointly for tax year 2025, your MAGI must be less than $236,000 in order to make a full contribution of $7,000 ($8,000 if you’re 50 and up). From $236,000 up to $246,000 you can only make a partial contribution. If you earn $246,000 or more, you are not eligible to contribute to a Roth IRA.

If you’re married, filing jointly for tax year 2026, your MAGI must be less than $242,000 in order to make a full contribution of $7,500 ($8,600 if you’re 50 and up). From $242,000 up to $252,000 you can only make a partial contribution. If you earn $252,000 or more, you are not eligible to contribute to a Roth IRA.

If you need help to determine your allowable contribution, you can use an Roth IRA contribution calculator to estimate what you can save. You may want to consult with a tax professional if you have any questions.

The Takeaway

A Roth IRA can be a useful tool for retirement planning, but it’s important to keep track of how much you’re saving. All IRAs, including Roth IRAs, have strict annual contribution limits. Making excess Roth IRA contributions could result in an unexpected — and costly — tax penalty.

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

What happens if you accidentally contribute too much to a Roth IRA?

If you make excess Roth IRA contributions the IRS can assess a tax penalty of 6% each year that they remain in your account. You can avoid the tax penalty by withdrawing excess amounts, recharacterizing them, or carrying them ahead for future tax years.

How do you correct excess Roth IRA contributions?

The easiest way to correct an excess Roth IRA contribution is to withdraw the excess amount, along with any interest earned. You can do that before the tax filing deadline, including extension deadlines, to avoid the IRS tax penalty. You cannot correct or recharacterize excess contributions once the tax-filing and extension deadlines have passed for the relevant tax year.

What is the penalty for excess IRA contributions?

A 6% tax applies to excess IRA contributions. The penalty applies each year that the excess contributions remain in your retirement account.

About the author

Rebecca Lake

Photo credit: iStock/mixetto

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

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Dec

2025

Ways to Build Wealth at Any Age

By Ashley Kilroy | Growing Wealth, Investing | No Comments

There are many time-honored ways to build wealth — at any age — and most of these methods include a few important steps: learning to set goals, save and invest, and avoid high-interest debt.

In other words, it’s possible to build wealth at any age, because almost anyone can learn the fundamental tenets of wealth-building. Embracing smart money-management habits may improve your long-term financial security, whether you use those funds for the purchase of a home, long-term goals such as retirement, or estate planning for after you’re gone.

The key, however, is to start as soon as possible, rather than wait until the right time (which may never come).

Key Points

• Building wealth can be accomplished at almost any age, because it’s the result of mastering smart money management skills.

• The common elements of wealth building include learning skills like saving, investing, setting goals, and avoiding certain types of debt.

• Wealth building also requires learning how to put your money into assets that have the potential to gain value.

• Being proactive about wealth building means saving and investing for the future, while finding ways to enjoy the present, too.

• Understanding wealth building at different ages also requires understanding specific challenges that can arise at various times of life.

Set Short- and Long-Term Goals

The first step in building wealth is to set short- and long-term goals that you can revisit and revise at any time, as needed.

Short-term goals focus on achieving near-term results, such as funding next summer’s trip or buying a new car.

In contrast, long-term goals might require several years or more of preparation. For example, you may want to collect enough to pay off your mortgage or send your kid to college . Creating realistic goals gives you direction, so make them as specific as possible.

Create a Budget

Once you know your goals, drafting a monthly budget is the next step.

Document up to three months’ worth of expenses by using a spending-tracker app, or a basic notebook. Then, break the list down into fixed costs, variable costs, necessary costs, and discretionary costs. It’s essential to know where your money is going, in order to make smart decisions about your priorities.

You probably can’t stop paying your utilities, but you will likely find places to save in your discretionary category (think restaurant meals, or entertainment expenses). Making cuts in some areas can help you channel money into your goals.

There are a number of effective budgeting methods and systems. Some rely on an app, others use hands-on strategies such as dividing your spending into separate envelopes. It’s important to try different budgets and find one you can stick with.

Pay Off Debt

To dedicate more money toward building wealth and saving for your goals, you’ll likely need to pay off some debt first. You can use your discretionary income as a tool for minimizing your debt load.

If you have multiple debts, consider using a debt reduction method, such as the avalanche method or the snowball method, to accelerate the process.

The Avalanche Method

The avalanche method prioritizes high-interest debts by ranking the interest rates from highest to lowest. Then, regularly pay the minimum on each of your debts, and put any leftover funds towards the one with the highest interest rate.

Once you pay that off, continue on to the second-highest debt. Follow that pattern to minimize the interest you’re paying as you become debt-free.

Snowball Method

Alternatively, the snowball method is another debt repayment strategy. It’s essentially the opposite of the avalanche approach. List your debts from the smallest balance to largest, ignoring the interest rates. Then, regularly dedicate enough funds to each to avoid penalties, and put any extra money toward the smallest debt.

After the smallest debt is paid, redirect your attention to the next largest debt, and so on. As the number of individual debts shrink, you’ll have more money to apply towards the larger debts. You may still have interests to worry about but picking off the debts one by one can impart a sense of forward movement and accomplishment.

Start Investing

Investing is an important way to build wealth at any age. Generally speaking, there are two ways to invest when building wealth. The first step is to max out your retirement savings. The second is to invest on your own.

Investing for Retirement

If you haven’t already, find out what if any employer-sponsored retirement savings plans are available to you, such as a 401(k) plan. These qualified retirement plans offer tax advantages, and typically allow you to direct a portion of your paycheck to your account, thus putting your savings on autopilot.

If your workplace does not offer any retirement accounts, consider whether you want to open an IRA — or a brokerage account to build an investment portfolio.

Generally, investing for retirement when you’re young means you can take on more risks. While a diversified portfolio is a standard strategy, younger investors might have a portfolio that’s heavier on equities , since they may help generate long-term growth.

As you get older and closer to retirement, your risk profile may change and your portfolio will need a rebalancing to incorporate more fixed-income investments, such as bonds, which are considered lower risk than stocks. Understanding stock market basics can help you become a more savvy investor.

Investing on Your Own

While investing for retirement should be a key part of your long-term wealth-building strategy, it’s also possible to open a taxable brokerage or online brokerage account for additional growth potential.

Investing always comes with the risk of loss, but many investors find ways to put their money to work by investing in low-cost mutual funds or exchange-traded funds (ETFs), as well as other types of securities.

One important aspect of active investing is knowing what the costs are. You may have to pay brokerage fees, expense ratios, trading commissions, and other charges. While these may seem small, or may be couched as a tiny percentage, investment fees can add up over time and reduce your returns.

How to Increase Your Income and Save More

You might be getting by on your current income, but there may be ways to boost what you bring home. With an extra-positive cash flow, you could pay down debt and save more, and achieve your goals sooner. Here are a few ways to make that happen.

Ask for a Raise

Asking for a salary increase is one solution for improving your cash flow. All it takes is a few good conversations, a positive work record — and a bit of courage and confidence. Speak to your peers and read up on how to conduct yourself when asking for a raise. Going in with a plan will save you anxiety and help you get your points across clearly.

Start a Side Gig

Additional work is also great to bulk up your resume and create new connections. It seems like everyone is starting up a side hustle these days. From online shops to freelancing, the opportunities are endless. All you have to do is determine your marketable skills and how to advertise them. There might be local opportunities, or you can create a profile online on side hustle-oriented websites.

Cut Expenses

Sometimes it’s not about finding new sources of money, but about creating a larger pool with the money already coming in. Take a second pass at your list of discretionary expenses to pinpoint a few more areas you could cut back on without feeling the impact in your day-to-day life.

One good example: Automatically renewed subscriptions for streaming services and local businesses, like gyms, are convenient. But think about how frequently you use the service. If the answer is “not often,” you’re not getting your money’s worth — and you may want to negotiate a lower fee, or cut the subscription altogether.

How to Build Wealth at Every Stage of Life

While it’s good to have a general strategy in place for building wealth and increasing cash flow, different stages in your life may require you to focus on different things. Taking advantage of the opportunities each decade brings you will help you financially adjust and build a stable lifestyle.

In Your 20s

You may be right out of school and trying to navigate the job market, but don’t wait to start working towards your long-term financial goals. The sooner you start, the sooner you’re likely to reach your goals.

Create an Emergency Fund

Generally, an emergency fund should include about three to six months’ worth of living expenses. Although that sounds like a lot, start small and save what you can. You’ll be grateful for the cushion if you should lose your job, need a car repair, or have a medical emergency.

Unexpected things happen all the time, and an emergency fund will protect you while you get things back up and running. It will also keep you from having to tap your savings accounts.

Eliminate High-Interest Debt

Your student loans aren’t going anywhere, so pay off student debt as soon as possible. The same goes for any other high-interest debt you might have incurred, such as with a credit card. Paying high interest rates will limit your ability to save.

However, don’t be afraid to use your credit cards responsibly. Your 20s are the perfect time to build good credit, which will be vital to certain goals, like purchasing a house. Use them strategically and pay them off immediately to build an upstanding credit history.

In Your 30s

Your 30s may bring some stability into your life, whether it’s a steady career, a partner, and/or kids. However, the costs you’re facing are likely growing with you. Focus on money moves that will benefit you long-term.

Plan for College Expenses

If you have children, saving for their education is a big step. Use opportunities like a 529 account to help provide the funding. A 529 plan is a tax-advantaged savings plan you can use to pay for future tuition and related costs. While saving for college is important, it’s essential to balance this with funding your retirement — which is an even bigger priority.

Pad the Nest Egg

By some popular estimates, by age 30 you should have at least one year’s worth of your annual salary saved for your retirement — and twice that by 35. Incrementally increasing the amount you put towards your savings will help boost that number as well. While these targets may seem big, the more important thing is to save steadily over time — that’s how real wealth-building happens.

In Your 40s, 50s and Beyond

By 40, conventional wisdom holds that you should be well on your way to a growing nest egg with three times your annual salary saved up. Again, this is just a target — but it can help you stay on track.

At this stage, you may also have other assets to your name, such as a home. If you have kids, they might be nearing college age, and retirement might not seem quite as far away as it once did. This will motivate you to save for your goals.

Protect Your Self and Your Wealth

It’s always smart to protect your assets — and yourself. Make sure you have insurance covering both you and your estate (through health and life insurance). Insurance can take a burden off of your family’s shoulders in case anything happens to you.

Capitalize on Make-Up Contributions

Maximizing your retirement savings is a key part of wealth-building at every age.

A make-up, or catch-up, contribution, is an additional payment that anyone over age 50 can make to their 401(k) or IRA account. If you’re in a financial position to contribute these extra funds, it can help bulk up those savings to help prepare for retirement.

For 2025, you can contribute up to $23,500 per year, and if you’re 50 or older, the maximum allowable catch-up contribution to 401(k) plans per year is $7,500, for a total of $31,000. In 2026, you can contribute up to $24,500 per year, and if you’re 50 or older, you can make a catch-up contribution of up to $8,000, for a total of $32,500.

However, there’s also something called a super catch-up contribution, which allows employees aged 60 to 63 to contribute an extra $11,250 in both 2025 and 2026 (instead of $7,500 and $8,000).

The annual IRA contribution limit for 2025 is $7,000, with those 50 and above allowed to contribute another $1,000 per year. In 2026, the limit if $7,500, with those 50 and older allowed to contribute an extra $1,100 per year. In total, anyone 50 or older can put $8,000 into their traditional or Roth IRA annually in 2025, and $8,600 in their IRA annually in 2026.

There are other types of retirement accounts for self-employed people that allow you to save more than in ordinary IRAs. Choosing the type of plan that matches your needs and helps you save and invest more is key to building wealth long term.

Wait to Take Social Security

Did you know you could receive a higher Social Security benefit if you wait to claim your benefits? Those who hold off collecting Social Security until age 67 — the full retirement age for people born in 1960 or afterward — get 108% of their benefits, and those who wait until the age of 70 can receive 132% of their monthly benefit.

On the other hand, if you begin taking benefits early, at age 62, you’ll receive 25% less in monthly benefits.

Shift Your Asset Allocation

Investors should periodically revisit their portfolio and reassess their investments and risk level. As you get closer to retirement, you may decide to allocate a larger part of your portfolio to safer choices like bonds and other fixed-income assets. This may not increase your nest egg, but it can help prevent losses.

The Takeaway

Building wealth at any age starts with a close look at your current income and expenditures, a detailed list of short-term and long-range goals — and a little follow-through based on where you are in life.

Some ways to start building wealth are to take on a side gig or side hustle, find ways to cut expenses and increase savings rates, and to start investing. There are numerous ways to do any of these, and it may take some experimenting to see what works for you.

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.

FAQ

What are the key principles for building wealth?

The basic tenets of building wealth may seem simple, but they require discipline. Spending less than you make, setting goals and saving toward those goals, learning to invest, and avoiding high-interest debt are generally good places to start.

Is 40 too late to start building wealth?

Even if you start at age 40, you should have enough runway to build wealth that can help support you later in life.

Does investing build wealth?

Investing involves risk, and there are no guarantees that investing your money will help it grow. That said, learning the ropes of how to invest and manage your money may help build wealth over time.

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

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