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What Happens If I Miss the Tax Filing Deadline?
If you miss the annual deadline for filing your income taxes, you don’t necessarily need to panic. Missing that tax filing deadline may not mean a big penalty, and you may have more options than you think. However, it can be wise to take steps to remedy the situation as soon as possible.
For 2023 tax returns, the deadline is set for April 15, 2024. If you’re wondering what might happen if you miss that date, read on. You’ll gain insights and steps to take, including:
• Reasons why someone may miss the tax-filing deadline
• What are the penalties for missing the tax-filing due date
• How tax extensions work
• What deadlines mean if you’re owed money
• How to get your taxes in on time
• How to file a late tax return
When Is the Tax Filing Deadline?
Usually, the tax-filing deadline is April 15 for the prior year. So if you are filing your return for tax year 2023, April 15 of 2024 would be the due date.
Worth noting: If April 15 falls on a weekend or holiday, the next business day is used. In the case of 2023, April 15 fell on a Saturday, but on Monday, April 17, the Emancipation Day holiday was observed in Washington, D.C. For this reason, the federal tax-filing date was actually on Tuesday, April 18, that year.
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Reasons Why Someone Might Miss the Tax Filing Deadline
Turning in school papers, paying your credit card bill, applying for rebates: Life is full of deadlines that sometimes are missed. Missing the deadline for taxes is no exception. Here are some common reasons why people don’t file on time:
• You think you don’t owe any money and figure, why bother to file?
• You think you do owe money but can’t afford to pay your tax bill, so you avoid it entirely.
• You are missing tax documents and didn’t have time to hunt for them or know where to find them.
• You ran out of time to get organized and file or simply procrastinated.
• You had trouble understanding taxes, got stressed out by the process, and didn’t get it finished.
• You couldn’t afford a tax preparer but realized you didn’t know how to file on your own.
• You got sick or injured or had a family emergency that interfered with filing.
• You had a change in status (i.e., were in the middle of a divorce or became widowed) and didn’t know how to file in those new circumstances.
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Are There Penalties for Missed Tax-Filing Deadlines?
“What happens if I miss the tax deadline?” you may wonder. The answer is: It can cost you. For individuals, the IRS can levy penalties for a few infractions related to the annual tax filing deadline. Here’s a closer look:
The most common punishment for this offense is a late payment penalty that’s equal to 0.5% of the money owed. But it’s important to be aware of these finer points:
• The IRS can penalize a taxpayer for “failure to file,” which occurs when a person fails to file their tax return by the appropriate April date or by the date specified if the person requests and receives an extension. The IRS can levy a penalty of 5% of the taxes owed per month for each month that the taxes are owed after the April filing deadline passes if you didn’t get an extension. This hits a cap of 25% after five months and can’t go any higher.
• Another infraction when missing the tax deadline is “failure to pay.” This occurs when a taxpayer doesn’t pay the money they owe on their tax return, even if they file on time. The most common punishment for this offense is a late payment penalty that’s equal to 0.5% of the money owed. That may not sound like much, but it’s due every single month, until the tax is paid in full. And that penalty can be as much as 25% of the overdue taxes.
• What if both “failure to pay” and “failure to file” penalties are applied in the same month? In this case, the “failure to file” penalty will be lowered by the sum of the “failure to pay” penalty applied that month.
• The IRS can also penalize taxpayers for failure to pay estimated taxes over the course of a year. The penalty will be calculated based on the amount of the underpayment, how long the taxes were left unpaid, and the interest rate the IRS charges.
• Another reason the IRS may charge a penalty is if your check to the government bounces. You will likely be assessed an additional 2% on the amount owed to the government.
One last note: You may wonder what happens if you file just a day or two late. It does matter! Even a single day late counts against you; the IRS takes deadlines very seriously.
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How Do Extensions Work?
There are years when completing your taxes by the April deadline is just too much to accomplish. Preparing for tax season and completing a return isn’t always simple. As a taxpayer’s financial life evolves, filing can become quite complex and time-consuming. And even if you use a professional tax-preparer, April can be an extremely hectic time for them, and they may not be able to fit you in before the big deadline.
So what happens if you’re missing the tax deadline? Don’t just sit back. This is when an extension may come in handy.
• The way to get one is to file an IRS Form 4868 , which is an application for permission to take an extra six months (until October) to file your taxes. Taxpayers, however, can’t be late when requesting the extension. You have to submit the form by the April deadline.
• You can file for an extension online or by mail.
• An extension only applies to filing your return. It’s important to note that you still have to send the IRS a check for your estimated taxes by April 15 or whatever the due date is in a given year.
• If you take, say, another month to file the complete return and you owe more than you estimated on Form 4868 in April, you may face penalties for the shortfall.
• Those penalties will typically grow with each month you take to file, even with the extension.
• If you overestimate the taxes you owe and pay too much by the April deadline, then you’ll receive a refund after you eventually file.
What Deadlines Mean If You’re Owed Money
All of this discussion about deadlines and penalties ignores one issue: What does all of this mean if you expect to get money back from the government in the form of a tax refund?
A tax refund happens if you overpay your taxes over the course of a year, whether through your regular paycheck deductions, quarterly payments, or other means. When you file your return, it’s a chance to get that money back. Tax refunds are quite common — in terms of 2022 returns filed in 2023, the IRS issued 237.8 million refunds to individuals, totaling about $512 billion.
All of the deadlines and penalties described so far apply to anyone who owes money to the IRS in a given year. For taxpayers who are owed money by the government, the rules are different. Some specifics:
• There is no late-filing fee for taxpayers who file returns requesting a refund from prior years.
• The annual tax filing deadlines have a different significance for people who will receive a refund check from the IRS. For these taxpayers, there’s a real incentive to file taxes ahead of the deadline. The sooner you file, the sooner you’re likely to receive your refund. The IRS says it issues roughly 90% of its refunds in under three weeks, though it warns that some returns require additional review and may take longer as a result.
• After a return is three years overdue, the IRS will no longer pay that money. The good news is that there is no late-filing fee for taxpayers who file returns requesting a refund from prior years.
It may seem unlikely that people would leave money unclaimed, but consider this: The IRS announced that it had more than $1.5 billion in unclaimed income tax refunds due to individual taxpayers who never got around to filing their federal income tax returns in 2019. Those unclaimed funds eventually become property of the U.S. Treasury.
So, as you see, it could definitely pay to file that return.
Tips for Filing a Late Tax Return
If you missed the tax filing deadline or know that’s going to happen, here’s advice:
• You can file the IRS Form 4868 requesting an extension by the tax filing deadline. Even if you do file for a tax extension, however, know that any funds owed are still due by the April date, but you may be able to send in the actual return later.
• Always file your return as soon as possible. You may want to contact a tax professional to assist you with this, or you can reach out to the IRS for help. You might want to call the IRS Tax Help Line at 1-800-829-1040 or visit your local IRS office.
• If you owe money but can’t pay it all at once, pay as much as you can, as soon as you can, and look into available options, such as payment plans with the IRS. These can give you an extended timeframe in which to pay what you owe. You may want to consult the IRS’ online Payment Plan tool.
Tips for Getting Your Taxes in on Time
Now that you’ve read about how complicated it can be if you miss the tax filing deadline, here are a few tips to help you get those returns in on time:
• Get organized early. Gather all the records you’ll need to file (such as a W-2) as they become available.
• Check against last year’s return to see if there were any forms you had then (say, a Form 1099 reflecting interest on a bank account) that you don’t have now. Track down anything that’s missing.
• Create or log into an account at IRS.gov to make tracking your progress easier. You can make payments there, too.
• Make sure you’ve withheld enough money so that you don’t owe too much when you file. If you do wind up having to pay a significant amount, develop a plan early to pay it on time or as close to on time as possible.
• Know your banking details or open a bank account so that you can use direct deposit, which is usually the fastest way to get a refund.
The Takeaway
Life happens: Sometimes, despite your best intentions, deadlines get missed. When that happens with tax filing, though, there can be some very real financial penalties involved. That’s why it’s important to know when your tax returns are due and then do everything in your power to file on time.
If you can’t get your return finished by Tax Day in mid-April, know the right moves to request an extension and possibly look into a payment plan for money owed that you can’t pay all at once. Having your bank account information handy, especially when you are due a refund, can be valuable.
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FAQ
When is the tax deadline?
The deadline for tax-filing is usually April 15 for the previous year’s taxes. However, if that date falls on a weekend or holiday, it will move forward by up to a few days.
How long are the tax extensions given if I miss the tax deadline?
The usual tax extension is six months. However, this is a longer timeline to file your return. Funds owed are still due in April. It can be wise to pay as much as possible towards your total debt to the IRS by Tax Day, and then send the remainder as soon as possible, perhaps via a payment plan with the IRS.
What happens if you miss the tax deadline by one day?
The IRS takes deadlines seriously. For every month that you are late filing your return, you will be assessed a penalty on the total amount owed. That wording of “a month” does not mean the first 30 days after the deadline are a kind of freebie during which you can send in your return and any payment due without penalty. Rather, being even a single day late puts you into that “one month” late category.
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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.
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Feb
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2024
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.
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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).
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.
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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.
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Feb
12
2024
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.
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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).
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.
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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.
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Feb
12
2024
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.
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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