Feb
12
2024
Guide to 457 Retirement Plans

Guide to 457 Retirement Plans

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Guide to 457 Retirement Plans

A 457 plan — technically a 457(b) plan — is similar to a 401(k) retirement account. It’s an employer-provided retirement savings plan that you fund with pre-tax contributions, and the money you save grows tax-deferred until it’s withdrawn in retirement.

But a 457 plan differs from a 401(k) in some significant ways. While any employer may offer a 401(k), 457 plans are designed specifically for state and local government employees, as well as employees of certain tax-exempt organizations. That said, a 457 has fewer limitations on withdrawals.

This guide will help you decide whether a 457 plan is right for you.

What Is a 457 Retirement Plan?

A 457 plan is a type of deferred compensation plan that’s used by certain employees when saving for retirement. The key thing to remember is that a 457 plan isn’t considered a “qualified retirement plan” based on the federal law known as ERISA (from the Employee Retirement Income Security Act of 1974).

These plans can be established by state and local governments or by certain tax-exempt organizations. The types of employees that can participate in 457 savings plans include:

•   Firefighters

•   Police officers

•   Public safety officers

•   City administration employees

•   Public works employees

Note that a 457 plan is not used by federal employees; instead, the federal government offers a Thrift Savings Plan (TSP) to those workers. Nor is it exactly the same thing as a 401(k) plan or a 403(b), though there are some similarities between these types of plans.

Get a 1% IRA match on rollovers and contributions.

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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.

How a 457 Plan Works

A 457 plan works by allowing employees to defer part of their compensation into the plan through elective salary deferrals. These deferrals are made on a pre-tax basis, though some plans can also allow employees to choose a Roth option (similar to a Roth 401(k)).

The money that’s deferred is invested and grows tax-deferred until the employee is ready to withdraw it. The types of investments offered inside a 457 plan can vary by the plan but typically include a mix of mutual funds. Some 457 retirement accounts may also offer annuities as an investment option.

Unlike 401(k) plans, which require employees to wait until age 59 ½ before making qualified withdrawals, 457 plans allow withdrawals at whatever age the employee retires. The IRS doesn’t impose a 10% early withdrawal penalty on withdrawals made before age 59 ½ if you retire (or take a hardship distribution). Regular income tax still applies to the money you withdraw, except in the case of Roth 457 plans, which allow for tax-free qualified distributions.

So, for example, say you’re a municipal government employee. You’re offered a 457 plan as part of your employee benefits package. You opt to defer 15% of your compensation into the plan each year, starting at age 25. Once you turn 50, you make your regular contributions along with catch-up contributions. You decide to retire at age 55, at which point you’ll be able to withdraw your savings or roll it over to an IRA.

Who Is Eligible for a 457 Retirement Plan?

In order to take advantage of 457 plan benefits you need to work for an eligible employer. Again, this includes state and local governments as well as certain tax-exempt organizations.

There are no age or income restrictions on when you can contribute to a 457 plan, unless you’re still working at age 73. A 457 retirement account follows required minimum distribution rules, meaning you’re required to begin taking money out of the plan once you turn 73. At this point, you can no longer make new contributions.

A big plus with 457 plans: Your employer could offer a 401(k) plan and a 457 plan as retirement savings options. You don’t have to choose one over the other either. If you’re able to make contributions to both plans simultaneously, you could do so up to the maximum annual contribution limits.

Pros & Cons of 457 Plans

A 457 plan can be a valuable resource when planning for retirement expenses. Contributions grow tax-deferred and as mentioned, you could use both a 457 plan and a 401(k) to save for retirement. If you’re unsure whether a 457 savings plan is right for you, weighing the pros and cons can help you to decide.

Pros of 457 Plans

Here are some of the main advantages of using a 457 plan to save for retirement.

No Penalty for Early Withdrawals

Taking money from a 401(k) or Individual Retirement Account before age 59 ½ can result in a 10% early withdrawal tax penalty. That’s on top of income tax you might owe on the distribution. With a 457 retirement plan, this rule doesn’t apply so if you decide to retire early, you can tap into your savings penalty-free.

Special Catch-up Limit

A 457 plan has annual contribution limits and catch-up contribution limits but they also include a special provision for employees who are close to retirement age. This provision allows them to potentially double the amount of money they put into their plan in the final three years leading up to retirement.

Loans May Be Allowed

If you need money and you don’t qualify for a hardship distribution from a 457 plan you may still be able to take out a loan from your retirement account (although there are downsides to this option). The maximum loan amount is 50% of your vested balance or $50,000, whichever is less. Loans must be repaid within five years.

Cons of 457 Plans

Now that you’ve considered the positives, here are some of the drawbacks to consider with a 457 savings plan.

Not Everyone Is Eligible

If you don’t work for an eligible employer then you won’t have access to a 457 plan. You may, however, have other savings options such as a 401k or 403(b) plan instead which would allow you to set aside money for retirement on a tax-advantaged basis. And of course, you can always open an IRA.

Investment Options May Be Limited

The range of investment options offered in 457 plans aren’t necessarily the same across the board. Depending on which plan you’re enrolled in, you may find that your investment selections are limited or that the fees you’ll pay for those investments are on the higher side.

Matching Is Optional

While an employer may choose to offer a matching contribution to a 457 retirement account, that doesn’t mean they will. Matching contributions are valuable because they’re essentially free money. If you’re not getting a match, then it could take you longer to reach your retirement savings goals.

💡 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.

457 Plan Contribution Limits

The IRS establishes annual contribution limits for 457 plans. There are three contribution amounts:

•   Basic annual contribution

•   Catch-up contribution

•   Special catch-up contribution

Annual contribution limits and catch-up contributions follow the same guidelines established for 401(k) plans.

The special catch-up contribution is an additional amount that’s designated for employees who are within three years of retirement. Not all 457 retirement plans allow for special catch-up contributions.

Here are the 457 savings plan maximum contribution limits for 2023 and 2024.

2023

 2024
Annual Contribution Up to 100% of an employees’ includable compensation or $22,500, whichever is less Up to 100% of an employees’ includable compensation or $23,000, whichever is less
Catch-up Contribution Employees 50 and over can contribute an additional $7,500 Employees 50 and over can contribute an additional $7,500
Special Catch-up Contribution $22,500 or the basic annual limit plus the amount of the basic limit not used in prior years, whichever is less* $23,000 or the basic annual limit plus the amount of the basic limit not used in prior years, whichever is less*

*This option is not available if the employee is already making age-50-or-over catch-up contributions.

457 vs 403(b) Plans

The biggest difference between a 457 plan and a 403(b) plan is who they’re designed for. A 403(b) plan is a type of retirement plan that’s offered to public school employees, including those who work at state colleges and universities, and employees of certain tax-exempt organizations. Certain ministers may establish a 403(b) plan as well. This type of plan can also be referred to as a tax-sheltered annuity or TSA plan.

Like 457 plans, 403(b) plans are funded with pre-tax dollars and contributions grow tax-deferred over time. These contributions can be made through elective salary deferrals or nonelective employer contributions. Employees can opt to make after-tax contributions or designated Roth contributions to their plan. Employers are not required to make contributions.

The annual contribution limits to 403(b) plans, including catch-up contributions, are the same as those for 457 plans. A 403(b) plan can also offer special catch-up contributions, but they work a little differently and only apply to employees who have at least 15 years of service.

Employees can withdraw money once they reach age 59 ½ and they’ll pay tax on those distributions. A 403(b) plan may allow for loans and hardship distributions or early withdrawals because the employee becomes disabled or leaves their job.

Investing for Retirement With SoFi

When weighing retirement plan options, a 457 retirement account may be one possibility. That’s not the only way to save and invest, however. If you don’t have a retirement plan at work or you’re self-employed, you can still open a traditional or Roth IRA to grow wealth.

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).

Help grow your nest egg with a SoFi IRA.

FAQ

How does a 457 plan pay out?

If you have a 457 savings plan, you can take money out of your account before age 59 ½ without triggering an early withdrawal tax penalty in certain situations. Those distributions are taxable at your ordinary income tax rate, however. Like other tax-advantaged plans, 457 plans have required minimum distributions (RMDs), but they begin at age 73.

What are the rules for a 457 plan?

The IRS has specific rules for which types of employers can establish 457 plans; these include state and local governments and certain tax-exempt organizations. There are also rules on annual contributions, catch-up contributions and special catch-up contributions. In terms of taxation, 457 plans follow the same guidelines as 401(k) or 403(b) plans: Contributions are made pre-tax; the employee pays taxes on withdrawals.

When can you take money out of a 457 plan?

You can take money out of a 457 plan once you reach age 59 ½. Withdrawals are also allowed prior to age 59 ½ without a tax penalty if you’re experiencing a financial hardship or you leave your employer. Early withdrawals are still subject to ordinary income tax.

Photo credit: iStock/Nomad

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

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

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

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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Feb
12
2024
Guide to Cash Balance Pension Plans

Guide to Cash Balance Pension Plans

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Guide to Cash Balance Pension Plans

A cash balance pension plan is a defined benefit plan that offers employees a stated amount at retirement. The amount of money an employee receives can be determined by their years of service with the company and their salary. Employers may offer a cash balance retirement plan alongside a 401(k) or in place of one.

If you have a cash balance plan at work, it’s important to know how to make the most of it when preparing for retirement. Read on to learn more about what a cash balance pension plan is and the pros and cons.

What Are Cash Balance Pension Plans?

A cash balance pension plan is a defined benefit plan that incorporates certain features of defined contribution plans. Defined benefit plans offer employees a certain amount of money in retirement, based on the number of years they work for a particular employer and their highest earnings. Defined contribution plans, on the other hand, offer a benefit that’s based on employee contributions and employer matching contributions, if those are offered.

In a cash balance plan, the benefit amount is determined based on a formula that uses pay and interest credits. This is characteristic of many employer-sponsored pension plans. Once an employee retires, they can receive the benefit defined by the plan in a lump sum payment.

This lump sum can be rolled over into an individual retirement account (IRA) or another employer’s plan if the employee is changing jobs, rather than retiring. Alternatively, the plan may offer the option to receive payments as an annuity based on their account balance.

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.

How Cash Balance Pension Plans Work

Cash balance pension plans are qualified retirement plans, meaning they’re employer-sponsored and eligible for preferential tax treatment under the Internal Revenue Code. In a typical cash balance retirement plan arrangement, each employee has an account that’s funded by contributions from the employer. There are two types of contributions:

•   Pay credit: This is a set percentage of the employee’s compensation that’s paid into the account each year.

•   Interest credit: This is an interest payment that’s paid out based on an underlying index rate, which may be fixed or variable.

Fluctuations in the value of a cash pension plan’s investments don’t affect the amount of benefits paid out to employees. This means that only the employer bears the investment risk.

Here’s an example of how a cash balance pension works: Say you have a cash balance retirement plan at work. Your employer offers a 5% annual pay credit. If you make $120,000 a year, this credit would be worth $6,000 a year. The plan also earns an interest credit of 5% a year, which is a fixed rate.

Your account balance would increase year over year, based on the underlying pay credits and interest credits posted to the account. The formula for calculating your balance would look like this:

Annual Benefit = (Compensation x Pay Credit) + (Account Balance x Interest Credit)

Now, say your beginning account balance is $100,000. Here’s how much you’d have if you apply this formula:

($120,000 x 0.05) + ($100,000 x 1.05) = $111,000

Cash balance plans are designed to provide a guaranteed source of income in retirement, either as a lump sum or annuity payments. The balance that you’re eligible to receive from one of these plans is determined by the number of years you work, your wages, the pay credit, and the interest credit.

Cash Balance Plan vs 401(k)

Cash balance plans and 401(k) plans offer two different retirement plan options. It’s possible to have both of these plans through your employer or only one.

In terms of how they’re described, a cash balance pension is a defined benefit plan while a 401(k) plan is a defined contribution plan. Here’s an overview of how they compare:

Cash Balance Plan

 401(k)
Funded By Employer contributions Employee contributions (employer matching contributions are optional)
Investment Options Employers choose plan investments and shoulder all of the risk Employees can select their own investments, based on what’s offered by the plan, and shoulder all of the risk
Returns Account balance at retirement is determined by years of service, earnings, pay credit, and interest credit Account balance at retirement is determined by contribution amounts and investment returns on those contributions
Distributions Cash balance plans must offer employees the option of receiving a lifetime annuity; can also be a lump sum distribution Qualified withdrawals may begin at age 59 ½; plans may offer in-service loans and/or hardship withdrawals

Pros & Cons of Cash Balance Pension Plans

A cash balance retirement plan can offer both advantages and disadvantages when planning your retirement strategy. If you have one of these plans available at work, you may be wondering whether it’s worth it in terms of the income you may be able to enjoy once you retire.

Here’s more on the pros and cons associated with cash balance pension plans to consider when you’re choosing a retirement plan.

Pros of Cash Balance Pension Plans

A cash balance plan can offer some advantages to retirement savers, starting with a guaranteed benefit. The amount of money you can get from a cash balance pension isn’t dependent on market returns, so there’s little risk to you in terms of incurring losses. As long as you’re still working for your employer and earning wages, you’ll continue getting pay credits and interest credits toward your balance.

From a tax perspective, employers may appreciate the tax-deductible nature of cash balance plan contributions. As the employee, you’ll pay taxes on distributions but tax is deferred until you withdraw money from the plan.

As for contribution limits, cash balance plans allow for higher limits compared to a 401(k) or a similar plan. For 2024, the maximum annual benefit allowed for one of these plans is $275,000. For 2023, the maximum annual benefit allowed is $265,000.

When you’re ready to retire, you can choose from a lump sum payment or a lifetime annuity. A lifetime annuity may be preferable if you’re looking to get guaranteed income for the entirety of your retirement. You also have some reassurance that you’ll get your money, as cash balance pension plans are guaranteed by the Pension Benefit Guaranty Corporation (PBGC). A 401(k) plan, on the other hand, is not.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Cons of Cash Balance Pension Plans

Cash balance pension plans do have a few drawbacks to keep in mind. For one, the rate of return may not be as high as what you could get by investing in a 401(k). Again, however, you’re not assuming any risk with a cash balance plan so there’s a certain trade-off you’re making.

It’s also important to consider accessibility, taxation, and fees when it comes to cash balance pension plans. If you need to borrow money in a pinch, for example, you may be able to take a loan from your 401(k) or qualify for a hardship withdrawal. Those options aren’t available with a cash balance plan. And again, any money you take from a cash balance plan would be considered part of your taxable income for retirement.

Pros Cons

•   Guaranteed benefits with no risk

•   Tax-deferred growth

•   Flexible distribution options

•   Higher contribution limits

•   Guaranteed by the PBGC

•   Investing in a 401(k) may generate higher returns

•   No option for loans or hardship withdrawals

•   Distributions are taxable

Investing for Retirement With SoFi

A cash balance retirement plan is one way to invest for retirement. It can offer a stated amount at retirement that’s based on your earnings and years of service. You can opt to receive the funds as either a lump sum or an annuity. Your employer may offer these plans alongside a 401(k) or in place of one, and there are pros and cons to each option to weigh.

If you don’t have access to either one at work, you can still start saving for retirement with an IRA. You can set aside money on a tax-advantaged basis and begin to build wealth for the long-term.

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).

Help grow your nest egg with a SoFi IRA.

FAQ

Is a cash balance plan worth it?

A cash balance plan can be a nice addition to your retirement strategy if you’re looking for a source of guaranteed income. Cash balance plans can amplify your savings if you’re also contributing to a 401(k) at work or an IRA.

Is a cash balance plan the same as a pension?

A cash balance plan is a type of defined benefit plan or pension plan, in which your benefit amount is based on your earnings and years of service. This is different from a 401(k) plan, in which your benefit amount is determined by how much you (and possibly your employer) contribute and the returns on those contributions.

Can you withdraw from a cash balance plan?

You can withdraw money from a cash balance plan in a lump sum or a lifetime annuity once you retire. You also have the option to roll cash balance plan funds over to an IRA or to a new employer’s qualified plan if you change jobs.

Photo credit: iStock/sturti

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

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

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

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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Feb
12
2024
How to File a Tax Extension

How to File a Tax Extension

By | Family Finances, Life & Career | Comments Off on How to File a Tax Extension

You can file a tax extension in a few different ways, such as online or by mail. This process can help people who may need more time to finalize their return, whether they are missing documents, dealing with a personal emergency, or have other reasons for being behind schedule.

While a six-month extension can be a good safety net, it’s important to learn the facts. For instance, an extension doesn’t mean you have more time to pay any taxes you may owe.

Read on to learn the facts and important considerations to know when filing a tax extension.

What Is a Tax Extension?

A tax extension extends the deadline for filing your federal tax return by six months. All you have to do to get an extension is request one by April 15, 2024. Here are important points to know:

•   A tax extension does not give you extra time to pay any taxes owed. If you can’t afford to pay your full tax bill, it’s a good idea to pay as much as you can by Tax Day and then apply for an individual payment plan on IRS.gov or call the IRS (Internal Revenue Service) at 800-829-1040 to discuss payment options.

•   The agency may waive the late-payment penalty in a few cases, but it will not waive interest charges on unpaid tax bills. The interest rate is the federal short-term rate plus three percentage points. In early 2024, for individuals, the rate was 8%, compounded daily.

•   The late-payment penalty, aka failure-to-pay penalty (you filed for an extension on time but still owe taxes), is much less severe than the failure-to-file penalty (you didn’t file your tax return by the due date and did not request an extension). The failure-to-file penalty is usually 5% of the tax owed for each month or part of a month that your return is late, up to 25% of the total owed.

Either way, a penalty plus interest on taxes owed past the deadline might be a good incentive for many taxpayers to try to cough up most of their bill on time.

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

How Do Tax Extensions Work?

There are three ways to request an automatic extension of time to file your return:

1.    File IRS Form 4868 electronically using your personal computer or through a tax professional who uses e-file. You’ll be asked to provide your prior year’s adjusted gross income for verification purposes. (If you do not know your prior year’s AGI and do not have a copy of that tax return, you can find the information by signing in to your IRS online account.)

2.    Mail a paper Form 4868. (The IRS says, though, not to mail in Form 4868 if you file electronically unless you’re making a payment with a check or money order.)

3.    Pay all or part of your estimated income tax due, and indicate that the payment is for an extension, using Direct Pay or the Electronic Federal Tax Payment System. You can also pay taxes with a credit card or debit card.

Special rules about filing extensions may apply to those serving in a combat zone or a qualified hazardous duty area or living outside the United States.

Recommended: Tax Season 2024 Help Center

Reasons to File for a Tax Extension

Many high earners routinely seek tax extensions because their business dealings and investments can take longer to sort out.
Other people might seek a tax extension for different reasons, such as:

•   Needing extra time to track down missing tax documents, especially if you’re dealing with an extenuating circumstance (for instance, the closure of a place of employment shortly before tax documents were due to be issued).

•   A major unplanned life event interrupts your plans and makes it hard to get things together on time.

•   You’re still figuring out how to do taxes as a freelancer and want to take all the deductions you can.

•   You’re going to take the home office tax deduction as a self-employed person and want to carefully crunch the numbers because you’re skipping the simplified deduction of up to $1,500.

•   General life busyness led to the deadline sneaking up on you.

•   Maybe you’re filing taxes for the first time and you simply procrastinated.

•   You have a primary and second home and are still unsure whether to itemize and take the mortgage interest deduction.

Filing for a Tax Extension Online

Remember, you don’t need to file Form 4868 if you make a payment using IRS electronic payment options or by phone and indicate that you want an extension.

If you do need to file Form 4868, you can do so electronically by accessing the IRS e-file with your tax software or by using a tax professional who uses e-file.

IRS e-file options include Free File, which lets you prepare and file your federal income tax online using guided tax preparation at an IRS partner site (for filers with AGI of $73,000 or less) or Free File fillable forms (for any income level).

Filing for a Tax Extension by Mail

You can simply download and print Form 4868 from IRS.gov, fill it out, and mail it in, along with a check for estimated income taxes owed.

The form itself includes information about where to send the document, depending on where you live.

Recommended: Steps to Prepare for Tax Season

Can I File for a Tax Extension If I Owe Money?

Yes, you can still file for a tax return extension if you owe the government money — but the money itself is still due on the original due date.

Unfortunately, there’s no way to file for an extension of taxes owed. Rather, your best bet is to pay as much of your estimated taxes as you can when you file for the extension, and then apply for a payment plan online or call the IRS to learn about your options for complete repayment.

Can Someone Be Denied a Tax Extension?

Yes, but it’s uncommon. If your tax extension was denied, it was probably because of a mistake in your personal information on Form 4868.

You can resubmit your request and make sure to enter your current address, name, and Social Security number correctly.

How to Know If You Owe Taxes

While self-employed individuals must estimate their taxes and pay on a quarterly basis, those who file using
W-2 wage reports may not do this kind of taxation math.

There are several easy ways to find out if you owe Uncle Sam.

•   You may receive a notice in the mail from the IRS, but ensure that it’s official correspondence and not a note from a scammer. The IRS will never email, text, or reach out to individuals via social media.

•   “Your Online Account” on IRS.gov allows you to see how much you owe in taxes. This user profile also allows you to pay any owed taxes directly.

•   You can always call the IRS at 800-829-1040 to confirm any amount of back taxes you might owe.

The Takeaway

Is it hard to file a tax extension? Not really. What may prove difficult is paying all taxes owed by the filing deadline (aka Tax Day) or paying a balance still owed plus a penalty and interest after the April date to file taxes.

It’s important to have a handle on your tax status and tax bill as April 15th arrives. It’s also wise to have a good banking partner and accounts that allow easy payment of any money you owe or refunds you receive.

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

How do I know if I’ve been approved for a tax extension?

Extension requests are rarely denied, but news of a denial would come by email. In the event of an error in an address or name, a taxpayer will be given a few days to remedy the error and file a tax extension again. Usually, you can get an automatic extension of time to file your tax return by filing Form 4868 electronically. You’ll receive an electronic acknowledgment of your request.

Is there a fee to file for a tax extension?

No. Filing for a tax extension is free.

Is the process for filing a tax extension easy?

Yes. You simply submit Form 4868 electronically or by mail before the filing deadline, or make a tax payment through approved methods and indicate you want an extension of time to file your federal return.

What happens if I file my taxes late and without an extension?

If you don’t pay your tax balance by the filing deadline and you did not file for an extension, you’ll get hit with a failure-to-file penalty (in most cases) and interest. Interest also compounds daily on any unpaid tax from the due date of the return until the date of payment in full.

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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.

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

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

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Feb
12
2024
Steps to Prepare for Tax Season: Woman doing her taxes

13 Steps to Prepare for Tax Season

By | Budgeting & Goals | Comments Off on 13 Steps to Prepare for Tax Season

It’s that time of year again: Typically, by midnight on April 15, taxpayers must e-file or mail their federal and, if applicable, state tax returns for the previous calendar tax year without penalty. Well before the deadline, though, it’s wise to do your prep work, hunting down the necessary documents, finding a tax pro or software to help you through the process, and learning about any new tax deductions or credits you might be eligible for.

It can definitely be a challenge to get organized, but by following certain steps, you can be ready to file properly and on time. Here, we’ll help you along with important tips, including:

•   When is tax filing season?

•   How do you prepare for tax season?

•   Should you hire a tax pro?

•   Which tax documents do you need?

•   By when do you need to file taxes?

When Is Tax Filing Season?

Tax season typically begins at the end of January. If you are filing your 2024 tax return, the IRS will start accepting and processing your tax returns on January 29, 2025. If you’re filing your 2025 return, the IRS will begin taking returns at the end of January 2026.

You should receive a Form W-2 by January 31st or, with any mail delay, soon thereafter. The same deadline applies to 1099-NEC forms for independent contractors. Each financial institution that paid you at least $10 of interest during the year must send you a copy of the 1099-INT by January 31st as well.

The due date for individuals to file their taxes is usually April 15th of a given year or, if that falls on a weekend, the next following weekday.

It’s generally not a good idea to wait until the last minute to prepare for tax filing. If you work for one employer, your taxes may not be complicated, but if you have side gigs or you’re self-employed, your tax returns can take a while to fill out.

💡 Quick Tip: Make money easy. Open a bank account online so you can manage bills, deposits, transfers — all from one convenient app.

13 Tax Prep Tips for 2025

Before filing, here’s how to prepare for the upcoming tax season.

1. Decide on Hiring a Pro or DIY

You can either prepare and file your taxes on your own or hire a professional. If you choose the latter, you can go to a tax preparation service like H&R Block or contact a local accountant or other tax pro. Some people feel more secure with a professional who can guide them through the process, know the latest deductions, and perhaps help them avoid IRS audit triggers.

The costs for a professional vary, and the more complicated a return is, generally the higher the costs will be.

The IRS has a tool where taxpayers can find a tax preparer near them with credentials or select qualifications. Doing so will mean paying a fee. How much? Tax preparation could run anywhere from $300 to $600 (or more), depending on where you live, how complicated your tax situation is, and how your tax professional charges for services.

Or, you could use software which is likely to cost less but require a greater investment of your time. For instance, TurboTax prices range from $89 and up, depending on whether you need additional features, like online assistance.

Recommended: How to File Taxes for Beginners

2. Consider Other Tax-Filing Options

You might also want to try this alternative: IRS Free File lets you prepare and file your federal income tax online for free. There are two options, based on income.

•   You can file on an IRS partner site if your adjusted gross income was $79,000 or less. This is a guided preparation, and the online service does all the math.

•   Those with income above $79,000 who know how to prepare their own taxes can choose the fillable forms option. The forms-based product can do basic calculations but will not provide step-by-step guidance. Also there is no state tax filing with this option.

Recommended: How to Pay Less in Taxes: 9 Simple Steps

3. Collect Tax Documents

Gathering the right papers is an important part of preparing for tax season. By the end of January, you should have received tax documents from employers, brokerage firms, and others you did business with. They include a W-2 for a salaried worker and Form 1099-NEC if you were self-employed (gig worker or freelancer) or did independent contractor work amounting to over $600 last year.

Employers will send the documents in the mail or electronically.

Investors might receive these forms:

•   1099-B, which reports capital gains and losses

•   1099-DIV, which reports dividend income and capital gains distributions

•   1099-INT, which reports interest income

•   1099-R, which reports retirement account distributions

Other 1099 forms include:

•   1099-MISC, which reports miscellaneous income (such as prize money or payments received for renting space or equipment)

•   1099-Q, which reports distributions from education savings accounts and 529 accounts

If you won anything while gambling, you’ll need to fill out Form W-2G. If you paid at least $600 in mortgage interest during the year, you’ll receive Form 1098, which you’ll need to claim a mortgage interest tax deduction.

A list of income-related forms can be found on the IRS website.

Last year’s federal return, and, if applicable, state return could be good reminders of what was filed last year and the documents used. That can help you pinpoint any missing tax documents.

4. Look Into Deductions and Credits

Wondering whether to take the standard deduction or itemize deductions? The higher figure is the winner.

The vast majority of Americans claim the standard deduction, the number subtracted from your income before you calculate the amount of tax you owe.

For tax year 2024, the standard deductions are:

•   $14,600 for single filers and those married filing separately

•   $29,200 for those married filing jointly

•   $21,900 for heads of household

Individuals aged 65 or older or who are blind can claim an additional standard deduction of $1,550 (for married filers) or $1,950 (for single or head of household filers).

For tax year 2025, the standard deductions are:

•   $15,000 for single filers and those married filing separately

•   $30,000 for those married filing jointly

•   $22,500 for heads of household

Individuals aged 65 or older or who are blind can claim an additional standard deduction of $1,600 (for married filers) or $2,000 (for single or head of household filers).

Individuals interested in itemizing tax deductions can look into whether they’re eligible for a long list of deductions like a home office (and, if eligible, whether to use the simplified option for computing the deduction), education deductions, healthcare deductions, and investment-related deductions.

•   You own a home and the total of your mortgage interest, points, mortgage insurance premiums, and real estate taxes are greater than the standard deduction.

•   Your state and local taxes (including real estate, property, income, and sales taxes) plus your mortgage interest exceed the standard deduction.

•   You spent more than 7.5% of your adjusted gross income for out-of-pocket medical expenses.

Then there are tax credits, a dollar-for-dollar reduction of the income tax you owe. So if you owe, say, $1,500 in federal taxes but are eligible for $1,500 in tax credits, your tax liability is zero.

There are family and dependent credits, healthcare credits, education credits, homeowner credits, and income and savings credits. Taxpayers can see the entire tax credits and deductions list on the IRS website.

Recommended: What Tax Bracket Am I In?

5. Be Sure to Include Dependents’ IDs

Details count (a lot) when filing your return, and one important point to include is the Social Security numbers for any children and other dependents. If you omit this, you may lose any dependent credits, like the Child Tax Credit, that you qualify for.

Also know that if you are divorced, only one parent can claim children as dependents.

6. Update Beneficiary Designations

On the subject of children, tax time is a good time to review and update beneficiary designations. While it won’t change your tax-filing calculations, it will potentially reduce the tax burden your beneficiaries may pay on what they inherit after you die.

7. Add to Your Retirement Contributions

As you get ready for tax filing, it’s wise to check your progress towards your retirement fund (hopefully you have one). Money that you put into a 401(k), 403(b), or other tax-deferred account reduces your taxable income. In other words, it helps minimize your tax bill. The contributions you make generally aren’t taxed until you decide to withdraw funds.

If you feel you can afford to contribute more, know that for 2024, the 401(k) contribution limit for employees is $23,000, with an additional $7,500 for catch-up contributions for taxpayers who are age 50 or older. For 2025, the 401(k) contribution limit is $23,500, with an additional $7,500 for those age 50 or older. In 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

8. Take Any Required Minimum Distributions

Another tax-filing tip: If you’ve reached retirement age, make sure you take any distributions that are necessary. You generally must begin taking annual withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts starting with the year you turn 73. When you reach the minimum age, you can delay your first mandatory withdrawal until April 1 of the following year. From then on, however, you must take your annual required minimum distribution (RMD) by December 31. If you miss the RMD deadline, you may get hit with a penalty of 25% of the RMD total.

9. Make a Final Estimated Tax Payment

Taxpayers who do not have taxes withheld from their paychecks can pay estimated taxes every quarter to avoid owing a big chunk of change come Tax Day.

Quarterly estimated taxes are typically due on April 15th, June 15th, and September 15th, with the fourth due on January 15th of the following year.

10. Apply for a Payment Plan If Needed

What happens if you discover, at tax filing time, that you can’t pay the full amount you owe? One option is to pay as much as you can and then set up a payment plan with the IRS for the rest. This is a method that gives you a longer time frame in which to pay what you owe. Depending on whether you have a short-term or long-term IRS payment plan , there may be setup fees.

11. File Electronically

Here’s an important tip: Prioritize filing electronically, especially if you anticipate receiving a refund. Electronic returns can typically be processed more quickly than paper ones, which means you’ll get your infusion of cash that much sooner.

Another benefit of filing this way is that your return is much less likely to have errors. Electronic returns tend to have just 0.5% with errors. But for “hard copy” paper returns, that number ratchets up to about 21% with mistakes.

12. Decide Whether to File for an Extension

What if you don’t quite have your act together and your tax filing materials ready to roll on time? It happens. If you need more time to prepare your federal tax return, you can electronically request an extension by filing Form 4868 by the April tax filing due date. This gives you until October 15 to file a completed return. Just keep in mind: Even if you file an extension, you are required to pay any taxes you may owe by the April deadline.

13. Avoid Tax Season Scams

Filing a tax return can be enough to keep you busy without worrying about getting scammed. But unfortunately, there are fraudsters out there, trying to take advantage of the season. For instance, you might get an email, phone call, or even a text message that says it’s from the IRS. They may say there’s an issue with a return of yours and that they need to speak with you ASAP. Don’t fall for it: The only way the IRS will ever communicate with you is via U.S. mail, unless you are involved in some kind of litigation with them.

The Benefits of Getting Prepared Early

Now that you’ve learned more about tax filing, here are some reasons to get started sooner rather than later on your return.

•   Avoid deadline anxiety. For some people, procrastination can lead to a lot of stress as the filing date approaches. They risk having to pull the proverbial all-nighter to get their return done on time or wind up blowing the deadline. By starting sooner, you can chip away at the process of pulling materials together and completing forms and breathe a little easier.

•   Dodge processing delays. If you file earlier, you are likely to slip in before the deluge of returns hits the IRS’s offices. You might even get your refund (if you’re due one) sooner.

•   Take the time to plan. Perhaps you know you’re going to owe money. Or, maybe you’re not sure if that’s the case. In either scenario, starting the tax-filing process earlier will give you time to see what you may owe and then figure out how to pay any funds that are due.

Recommended: Tax Preparation Checklist 2025: Documents You Need to Gather

The Takeaway

“Tax prep” isn’t a phrase signaling that big fun is on the way, but putting off the inevitable probably isn’t the best choice. To save yourself stress, you’ll want to prepare for tax season as early as possible by gathering documents and information, choosing a preparer or getting ready to DIY, and learning about tax credits and deductions.

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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

When can I start filing my taxes?

Tax filing season typically begins at the end of January. For example, the Internal Revenue Service (IRS) will begin accepting 2024 tax returns on January 29, 2025.

Should I use a tax preparer?

It’s a personal choice whether to hire a tax preparer or file your taxes yourself. A tax preparer will likely reduce the time you have to spend doing your taxes and can apply their professional knowledge to help you know what credits and deductions you qualify for. However, you will have to pay a fee for this service, which could run anywhere from $300 to $600 (or more), depending on where you live and how complicated your tax situation is.

What documents do I need to prepare for tax season?

You’ll need to gather a variety of documents for tax season, including income received (W-2s and/or 1099s to show earnings, and 1099s that reflect interest and dividends earned), records of deductions (relating to home ownership, charitable donations, medical expenses, educational costs, and the like). And, of course, you’ll need personal information like your Social Security number and that of any dependents.

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

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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Checking & Savings Fee Sheet for details at sofi.com/legal/banking-fees/.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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

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.

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2024

What Is Earned Wage Access?

By | Budgeting & Goals, Family Finances, personal_loan | Comments Off on What Is Earned Wage Access?

Earned wage access is an employer-provided benefit that allows employees to access a portion of their paycheck ahead of payday. This can be immensely helpful for employees living paycheck to paycheck who incur unexpected, emergency expenses.

On-demand access to money that employees have earned can keep them from relying on more dangerous and costly alternatives, like payday loans, cash-advance apps, and even intentionally overdrafting their bank accounts. But earned wage access programs may also carry some fees, and they can inspire bad habits with budgeting and money management.

How Does Earned Wage Access Work?

Earned wage access (EWA) works similarly to a cash advance app, except that it’s an employer-provided benefit. Employees who work at a company offering this benefit can download the app of the third-party EWA provider that their company works with and then apply to access a portion of their paycheck.

Employers typically limit how much of a paycheck employees can access early. EWA providers charge a fee for this access. In some cases, the employee will have to pay the fee every time they use the service; in others, employers foot the bill as part of the benefit.

Recommended: What Are Credit Card Cash Advances?

Earned Wage Access Example

Here’s an example of how earned wage access (also sometimes called early wage access) might work in the real world:

An hourly employee earns $20 an hour, after taxes and retirement contributions. Though she receives her paycheck every two weeks, the employee realizes she needs money now to cover an emergency vet bill. She has already worked six days, meaning there are four working days before the end of the pay period — and more time before payroll processes.

She uses the EWA app that her company has partnered with to apply for early access to her paycheck. There is a $5 fee, but her company covers the cost as part of the earned wage access benefit. The EWA benefit is limited to 50% of her total pay for the period, so the employee then receives $800 ahead of her paycheck.

On payday, the employee usually receives a check for $1,600. Because she’s accessed $800 early, however, her paycheck will only be $800.


💡 Quick Tip: Some lenders can release funds as quickly as the same day your loan is approved. SoFi personal loans offer same-day funding for qualified borrowers.

How to Qualify for Earned Wage Access

Qualifying for earned wage access is easy. You just have to work at a company that offers it as a benefit. EWA is growing increasingly popular. Companies like Uber, McDonalds, and Walmart have all adopted early wage access as an employee benefit.

Unlike personal loans or credit cards, there’s no credit check to access the money early. Instead, you’ll just need to download the app of the program that your company has partnered with and connect it to your bank account or debit card to have the money transfer go through.

Earned Wage Access Pros and Cons

Earned wage access offers tremendous benefits, especially to employees who are struggling financially. However, EWA also has its fair share of drawbacks to consider.

Pros

•   Fast access to money: The best way to handle unexpected expenses is to draw money from your emergency savings fund. In theory, the money will have been sitting there — in a high-yield savings account actively earning interest — so you don’t have to rely on credit cards, personal loans, cash advance apps, or payday loans. However, people who live paycheck to paycheck understandably can’t build an emergency savings fund. Earned wage access offers another path forward. You’ll be withdrawing money you’ve earned, just a little early. That means you aren’t taking on debt to cover life’s unexpected expenses.

•   Easy to qualify: Taking out a personal loan for emergency expenses is often a smart idea if you don’t have the money in savings. But if your credit score is in poor shape, you might have trouble getting approved for a personal loan. Getting money through earned wage access may be easier. As long as your company offers this as a benefit, you don’t have to worry about credit checks and high-interest debt.

•   No fees (or at least low fees): Many employers cover the admin fee of earned wage access for their employees as part of the benefit. Other employers might have arrangements with EWA platforms that don’t charge fees when employees access their funds early. Even if the employee is responsible for a transaction fee for an EWA, the cost is usually low.

Cons

•   Smaller paycheck: When you need money in a pinch, earned wage access can be a great solution that doesn’t involve taking on debt. However, when payday arrives, your paycheck could be much smaller. Often, EWA platforms allow you to access up to 50% of your paycheck, meaning your payday will be cut in half. While you’ve covered the cost of the emergency expense, you’re now faced with paying your monthly bills on only half of your normal check. That could mean tightening your belt at the grocery store or making late payments on bills.

•   A bad habit: Like cash advance apps or even payday loans, EWAs can be a slippery slope. You may access a portion of your paycheck early during one pay period, get a smaller paycheck as a result, and then need to turn around and access the next paycheck early to make up for your reduced paycheck. According to a 2021 study by the Financial Health Network, more than 70% of employees who utilized earned wage access used it in consecutive pay periods. It’s a difficult pattern to get out of — and could be even more detrimental if you change jobs and your new employer doesn’t offer EWA. In that case, you might be tempted to take out a predatory loan instead.

•   Potential fees: In some cases, employees do have to pay for earned wage access. These fees are usually nominal, especially when compared to alternatives — overdraft fees from spending more than they have in their bank account or exorbitantly high interest rates for payday loans — but EWA fees should still be a consideration for people on a budget. Maybe there’s another alternative, like borrowing money from a family member or a payment plan for whatever emergency expense the employee has incurred.

Recommended: How to Avoid Overdraft Fees

Earned Wage Access vs Cash Advance Apps

Cash advance apps, also referred to as early payday apps, share some similarities with earned wage access. Both are typically managed through mobile apps and help you access cash flow ahead of your next paycheck.

Earned wage access, however, is offered solely through an employer. The employer may cover fees for the employees, and the amount a person can access is related to their actual paycheck.

With a cash advance app, consumers are responsible for any associated fees. Some apps may advertise no fees (and no interest), but they may charge a fee for instant transfers. Otherwise, you’ll have to wait a few days to get the money, which often defeats the purpose. Other cash advance apps might have a monthly charge.

The amount you can borrow through a cash advance app varies and may be tied to the cash flow of your linked bank account. Repeat borrowers may get approved for higher funds. Repayment is due on the borrower’s next payday.

Though hidden fees can make cash advance apps expensive, they’re generally a safer option than payday loans.


💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.

The Takeaway

Earned wage access can be helpful in an emergency situation, if your employer offers this benefit. However, EWA may come with fees, can make it more challenging to budget on payday, and may even lead to a recurring habit. As an alternative in an emergency solution, you can take out a personal loan. It won’t affect your upcoming paycheck, you can use loan moneyfor a variety of purposes, and it can give you the funds you need, at a low cost, to get through a financial hardship.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. 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

Is earned wage access a loan?

Earned wage access is not a loan. It allows employees at participating companies to access money they’ve already earned, just ahead of schedule.

What are the benefits of earned wage access for employees

Earned wage access offers employees several benefits, including fast access to money they’ve technically earned, no or low fees, and easy qualification requirements. (You’ve just got to work for a company that offers this benefit.)

What are the downsides of earned wage access?

Earned wage access can have some downsides. Employees may have to pay fees to get early access to their paycheck, the amount you can access is often capped at 50%, and it can lead to a bad habit wherein you regularly need money before your paycheck.

Photo credit: iStock/Ivan Pantic

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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.

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

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

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