investment

Fact checked by Betsy Petrick

Drowning in credit card bills can feel overwhelming with no way out, and you may be tempted to use your retirement savings to pay down your debt. However, that’s not a good idea, and you should think twice before you tap into your nest egg.

Using money from an individual retirement account (IRA) can have major consequences. Doing so depletes your savings, foregoes future capital gains, and can lead to serious tax implications. Consider alternatives before taking this extreme step to paying off your credit card balances.

Key Takeaways

• Paying off your credit card debt using money from your IRA may require paying income taxes, plus a 10% penalty, on the money withdrawn.
• Consider alternatives like debt consolidation loans, balance transfer credit cards, or a loan against your 401(k).
• Bankruptcy may be an option if you have exhausted all other avenues.

Why You Shouldn’t Use Your IRA to Pay Off Credit Card Debt

If you have trouble dealing with your credit card debt, you’re not alone. According to the Federal Reserve, credit card balances in the U.S. reached $1.21 trillion at the end of the fourth quarter of 2024, which is an increase of $45 billion from the previous quarter. The average credit card balance per consumer was $6,380 at the end of September 2024.

Given their high interest rates and the impact your balances can have on your debt-to-income (DTI) ratio and your credit score, it may seem like there’s no way out. But you have options that do not include using your IRA, no matter how tempting it might be.

Reasons to avoid using your retirement account include:

• An IRA is meant to help you save for retirement. Raiding your nest egg means that you’re taking away money for future use.
• You’ll lose out on any future earnings. Not only does the principal balance in your IRA earn interest, but this interest also earns interest through compounding. This boosts your earnings even more. By taking money out, you don’t give your money a chance to grow.
• The government imposes fines and penalties on withdrawals from IRAs if they aren’t used for retirement.

Note

Almost half of households in the U.S. (46%) have credit card debt. Most of this debt is being carried by middle-income households.

What Are the Tax and Penalty Implications of Using Your IRA to Pay Off Credit Card Debt?

The point of having an IRA (or any other retirement account) is to help you save for retirement, so it shouldn’t be treated like a savings account. The government has put measures in place, including taxes, penalties, and age limits, to make them less attractive to use. The Internal Revenue Service (IRS) sets the age limit at 59½.

The taxes and penalties, though, depend on how old you are for traditional IRAs:

• If you are under 59½: Your withdrawal counts as gross income. This means it is taxed at your normal income tax rate at the federal and state levels. You also are responsible for paying an additional 10% penalty on that amount.
• If you are over 59½: There are no restrictions or penalties. Withdrawals made using pre-tax dollars may incur income taxes at your normal rate at the federal and state levels.

Roth IRA withdrawals are a little different. Contributions made in the year before you file your taxes can be withdrawn without incurring any taxes or penalties. That’s because they are after-tax contributions, so the IRS considers they were never made. Any earnings on those contributions, though, are taxed as ordinary income and may be subject to a 10% penalty if you haven’t held the account for five years, regardless of your age.

Say you’re 45 and plan to retire at 65. You decide to withdraw $10,000 from your traditional IRA to pay off your credit cards. Your account holds $25,000, leaving you with $15,000. Let’s assume that your federal tax rate is 22% and that your IRA will grow annually at 6%.

• You’ll owe $2,200 for federal income taxes and $1,000 for the 10% early withdrawal penalty. This leaves you with only $6,800 from your withdrawal. Keep in mind that we haven’t factored in state income taxes if applicable, so you may owe more.
• You stand to lose a little over $32,000 in earnings if you withdraw $10,000 at 45 and plan to retire at 65.

So remember: just because you can use your IRA doesn’t mean you should.

Alternatives to Using Your IRA to Pay Off Debt

Consider options other than your IRA if you want to pay off your credit card balance. Some of these alternatives may require you to do some work and have a good credit score, such as a debt consolidation loan or a balance transfer credit card. You may also want to think about taking a loan against your 401(k). Then there’s the last resort: bankruptcy.

Debt Consolidation

Debt consolidation involves taking out a personal loan to pay off all your existing credit card debt. If you qualify and are approved for the loan, the lender issues you a lump sum that you can use to pay off all your credit cards. You are only responsible for making a single payment to the new lender instead of to multiple card issuers. The terms of these loans tend to be more favorable—usually lower rates and a lower payment.

Balance Transfer Credit Card

Consider transferring your balances to another credit card, especially one with a lower interest rate. You may qualify for a new card that comes with intro offers, such as 0% interest on balance transfers for a certain period—usually from six to 21 months. In some cases, an existing credit card company may extend you favorable balance transfer terms if you have a good relationship with them. Keep in mind that most companies charge a fee, which is a percentage of the amount being transferred.

401(k) Loan

You can borrow against your 401(k) if you have one. Unlike a traditional loan, there is no credit check, and unlike some IRA withdrawals, this type of loan is tax-free. You can borrow up to $50,000 or 50% of your vested balance—whichever is less. You must apply for the loan through your plan administrator and repay the loan within five years. Interest is also due on the loan (usually at 1% to 2% above the prime rate) but is added to your 401(k) balance.

Filing for Bankruptcy

Bankruptcy always should be your last resort. It is filed through the federal court system by a trustee, a professional who oversees your affairs. People with a lot of credit card (and other unsecured) debt generally file for Chapter 7 bankruptcy. If you have any non-exempt assets with value, they are sold to pay off some of your creditors. If you have exempt items like furniture and clothing, your creditors won’t get paid. Remember, bankruptcy stays with you for up to 10 years.

The Bottom Line

Credit cards can help you pay for everyday purchases and emergencies. But they can be problematic if you overspend and/or don’t have the income to repay them. Paying off your troubling credit card debt should never be an excuse to raid your IRA. Doing so not only defeats the purpose of saving for retirement, but it also comes with hefty fines or penalties. Consider some of the alternatives, including debt consolidation loans, balance transfer cards, and loans against your 401(k). If all else fails and there is no other option left, talk to a financial advisor about bankruptcy.

Many banks don’t limit the amount of cash you can deposit. However, depositing more than $10,000 will subject your deposit to extra rules and regulations from the bank and the federal government. 

If you have a substantial deposit to make, know that holding more than $250,000 at the same bank—even in multiple accounts—may not be in your best interest. FDIC insurance doesn’t protect additional amounts over this threshold.

Key Takeaways

• The majority of banks don’t limit how much cash you can deposit, but all institutions have to report deposits of $10,000 or more to the federal government. 
• It’s safest to deposit large sums in person, but you could opt for an armored transport for sums greater than $50,000. You could ask your bank or use another service; just know there may be a fee. 
• Structuring cash deposits to avoid reporting is illegal, even if your money is from legitimate sources. You could face severe penalties, including prison time and hefty fines.

Bank Deposit Limits

Most banks don’t have cash deposit limits, but ATMs might only be capable of accepting a certain number of bills at a time, such as 40. This would limit the amount you’d be able to deposit in one transaction, depending on the denominations of the bills. For example, with a limit of 40 bills, the maximum you could deposit would be $4,000 (in $100 bills). You might be able to deposit more by doing a second transaction. 

Here are some examples of institutions that do have cash deposit limits:

Sample Bank Deposit Limits
Institution	Cash Limit
Capital One	$5,000 in one-time deposits; no daily limit at ATMs
Chime	Up to $1,000 per day at Walgreens cash registers
Alliant Credit Union	$20,000 per day at ATMs
Navy Federal Credit Union	$10,000 per card per day at a CO-OP ATM

Important

If you need to deposit a large amount of cash, it’s best to check with your institution about its policies for your account.

Why Are Banks Required to Report Cash Deposits of More Than $10,000?

Federal law requires banks to report deposits of more than $10,000. No matter where the money came from or why it’s being deposited, your bank must report it by filing a Currency Transaction Report (CTR).

Under the Bank Secrecy Act and the USA PATRIOT Act, the government tracks the money to make sure it isn’t from crimes like money laundering or terrorist activity. The law applies to both single deposits and multiple deposits in a day that add up to more than $10,000.

Important

Banks keep records of deposits over $100 for at least five years but can keep them longer if they choose.

How Can I Deposit More Than $10,000 in Cash?

The best way to deposit large amounts of cash is to visit a branch in person. It’s safer, and a banker can count the money in front of you in a more private area to ensure you agree on the deposit amount. 

Alex King, former vice president in Trade & Working Capital at Barclays Bank, chartered accountant, and founder of Generation Money, also advised in an email to Investopedia to make sure to use a briefcase or non-transparent and secure bag to make it less obvious that you’re carrying a large amount of cash. He also recommended bringing a valid ID and records showing the source of the cash, such as business invoices or legal documents. 

Businesses sometimes use armored transports for large cash deposits, but they’re available for personal deposits as well. King said armored transports might make sense if you’re depositing at least $50,000. You can ask your bank to arrange them or work with another company. 

“You’ll need to pay a fee which, for a one-off cash deposit, is either a fixed fee or a percentage of the amount of cash you’ll be transporting,” King explained. “Or, if you’re a business owner who needs to regularly deposit large sums of cash, you can sign up for a regular armored transport service where you’ll pay a subscription fee.”

What Happens When Large Deposits Are Reported?

Financial institutions use Currency Transaction Reports to inform the federal government about deposits greater than $10,000. These reports go to the Financial Crimes Enforcement Network (FinCEN).

In most cases, a CTR must be filed for each currency transaction that exceeds $10,000. This includes bank deposits, withdrawals, currency exchanges, payments, and transfers.

Federal law requires financial institutions to gather personal information about the depositor. This might be a Social Security number, driver’s license, or government-issued ID. This information must be obtained whether or not the depositor has an account at the receiving financial institution.

What Is Structuring?

Structuring is when you divide a large deposit into smaller amounts to avoid CTR reporting requirements. It seems innocent enough if your money is from legitimate sources, but it’s still illegal. You could face up to five years in prison and a fine of up to $250,000. These penalties are doubled if you structure more than $100,000 over 12 months or combine structuring with breaking another federal law.

“Even without legal action, banks can still freeze or close accounts if a customer is structuring deposits. This is another reason it’s important to keep good records and have all relevant documentation to show the source of the cash deposits,” advised King.

What Is IRS Form 8300?

IRS Form 8300 is a tax form for businesses to report cash payments of more than $10,000 received in a single transaction. Multiple related transactions totaling more than $10,000 also require businesses to file this form. Cash payments include U.S. or foreign currency and cashier’s checks, bank drafts, traveler’s checks, and money orders with a face value of $10,000 or less.

Warning

You have 15 days after receiving the payment to file Form 8300 with FinCEN either electronically or on paper with the IRS. You also have to provide a copy to the person or business that made the payment by January 31 of the following year.

The Bottom Line

While most banks don’t impose strict limits on cash deposits, some ATMs can only handle a limited number of bills at a time. If you’re not sure about your bank’s limits, it’s worth checking with customer service.

Understanding federal reporting requirements for deposits over $10,000 is crucial. Always deposit large sums safely, either in person at your bank branch or through an armored transport service for very large cash deposits. 

You should also document your cash source and avoid structuring deposits to get around reporting requirements. Doing so can result in severe legal penalties, regardless of whether your funds are legitimate. 

By following proper procedures and maintaining transparency with financial institutions, you can safely deposit large cash amounts without breaking the law or your bank’s policies.

Leasing and buying each have their pros and cons, so your financial situation and priorities will help you decide which is the right choice. For example, if you have a long commute or love road trips, financing and/or owning a car might be a better option. But if you’d like to drive a brand-new car every few years and you don’t drive a ton of miles, leasing could be a great fit.

Before you start checking out online ads and visiting dealerships, here’s how to decide if you should lease or buy your next ride.

Key Takeaways

• Leasing a car is like a long-term rental in that you pay a fee to drive a car for a certain length of time.
• Buying a car is paying to own it, whether you pay in full or finance the purchase with an auto loan. 
• Leasing typically has lower monthly payments and lets you drive a new car every few years, but comes with restrictions on mileage and doesn’t let you build equity.
• Buying often costs more but allows you to build equity, have complete control over your car, and drive as much as you’d like.

Leasing vs. Buying a Car: What’s the Difference?

Leasing a car is similar to renting: You pay a fee in exchange for the ability to use the car for a certain amount of time, such as three years. 

During that time, your lease agreement dictates how you can use the vehicle, such as whether you can modify it and how many miles you can drive. At the end of the lease period, you return the car, hand over the keys, and stop making payments. Depending on your agreement, you may also have the option to buy the vehicle at the end of the lease period.

Buying a car means you own it. If you pay cash, such as for a used car, you might own your vehicle outright from the start. If you finance the purchase with a car loan, you’ll build equity in the vehicle as you make payments. At the end of the loan term, you’ll own it outright and you can choose to sell it, keep it, or trade it in toward the cost of another vehicle.

Either way, when you buy a car, you can drive as many miles as you’d like. You can also make modifications to better suit your needs, such as upgrading a vehicle’s suspension or getting a custom paint job.

Leasing	Buying
Pay to drive a car for a specific amount of time	Own and drive for as long as you want
Payments don’t build equity; you don’t own the car	Loan payments build equity until you own the car outright
Lower monthly payments and low or no down payment	Higher monthly payments and higher down payment typically required
New car every few years, on a specific timeline	Can sell or trade in anytime, or keep as long as you’d like
Warranty-covered repairs	Typically need to cover maintenance and repair costs yourself
Restrictions on mileage and allowable modifications	Total control: You can drive as much as you want and make any changes you desire
Early cancellation penalties	Flexibility to change vehicles as needed
May have special fees at lease end, such as for damage beyond normal wear and tear	No special fees, but depreciation affects value over time

Pros and Cons of Leasing

At first glance, leasing might seem like a great deal. You get a new car every couple of years, and the monthly payments you’ve seen advertised seem cheaper than what you’d pay for a car loan.

Pros of Leasing

• Lower monthly payment: A lease payment is typically cheaper than a monthly auto loan payment for the same vehicle. That’s because you’re only paying for the expected depreciation of the vehicle during the lease period, rather than the full purchase price.
• No down payment: You typically don’t need to make a down payment, although you can if you’d like to reduce your monthly payments (you won’t save any money on interest if you do that, however, so it doesn’t usually make sense to put down a down payment).
• New vehicle every couple of years: If you love that new car smell, a lease lets you enjoy it on a regular basis. When your lease ends, typically after two to four years, you can return the car and pick up a new one.
• Warranty-covered repairs: Many new cars are covered by a factory warranty, and some dealer warranties may cover other maintenance and repairs. 
• No need to resell: When the lease ends, you can simply walk away—no need to negotiate with a dealer for a trade-in or deal with the hassle of selling the car yourself, although you can trade it in if you wish.
• Easier business deduction: If you use your leased vehicle for business purposes, you can claim the costs as a tax deduction from your business income. 

Important

Before you sign a lease, make sure you fully understand the tradeoffs.

Cons of Leasing

• No equity: Your lease payments are like rent. They cover the costs of depreciation during the lease, but they don’t help you build any equity or ownership. At the end of the lease, you don’t own the vehicle (though you may have the option to purchase it).
• Restrictions on use: Leases typically cap the number of miles you’re allowed to drive each year, such as 10,000 to 15,000. You’re also not usually allowed to make modifications and you’ll need to pay a fee for any damage beyond what the leasing company considers normal wear and tear. 
• Early cancellation penalties: If life happens and you need to end a lease early, such as to get a vehicle that can accommodate carseats, you may pay hefty fees. But you might be able to avoid them by trading the car in.

Pros and Cons of Buying

It often costs more to buy a car than it would to lease the same vehicle, both in terms of a higher down payment and higher monthly payments on a car loan. But it’s important to weigh the pros and cons to understand whether that extra cost might be worth it for you to enjoy the benefits of owning a car, whether you buy it outright or finance it with a loan.

Pros of Buying

• Ownership and control: Every payment on your auto loan builds equity, and you own the car outright once you pay off the loan (or from the start, if you paid cash). You can drive as many miles as you’d like and modify your car in any way you want.
• Option to sell, trade, or keep: Whenever you’re ready, you can choose to trade in your car toward a new vehicle, sell it, or give it to a family member. You can also aim to drive it as long as it lasts, with no more payments once your loan is paid off.
• Flexibility: It’s typically easier to get out of a car loan than a lease. If your needs change and you want to sell the car or trade it in, you can usually pay off your loan anytime without incurring pre-payment penalties. 

Cons of Buying

• Higher costs: Your loan may require you to pay a down payment, such as 20% of the purchase price. Monthly loan payments may also be higher on an auto loan than they would be to lease a comparable car. 
• Depreciation: A 2024 AAA analysis estimated that a new car would lose an average of $4,680 in value per year over the first five years and 75,000 miles due to depreciation. That was nearly half the average MSRP used in the study.
• Maintenance and repair costs: Unless you buy a new vehicle covered by a factory warranty, you’ll need to pay for regular maintenance and to fix any damage. 

Leasing vs. Buying: How to Decide

Whether you should lease or buy depends on your situation and needs. If you need a new vehicle at a lower cost and don’t plan to drive more than 10,000 or 15,000 miles per year, leasing could be a good option. 

Leasing a car allows you to drive a new vehicle for less than it would cost to buy (or finance) it. At the end of your lease, you hand over the keys without the hassle of negotiating a trade-in or selling a car yourself. You can then start a new lease in a brand-new vehicle. 

But if you’ve saved up enough for a car loan down payment and value the flexibility and control that come with ownership, buying could be a better fit.

After all, a lease is like a long-term car rental in that you’re paying to drive the car, not building any equity or ownership of it. At the end of the lease, you don’t own the car. Most leases also cap the number of miles you can drive each year and don’t allow you to make modifications. 

If you decide that buying a car is a better option for you, use our auto loan calculator to consider your options based on your purchase price, down payment, term, and credit score.

The Bottom Line

Leasing a car is like a long-term rental, and may be a cheaper way to drive a new vehicle. Buying a car gives you ownership and control, but it may cost more upfront and, if you finance a vehicle, your monthly loan payments may be higher than leasing. Buying and leasing are both great options—neither one is better in every case. The best choice for you depends on your lifestyle and financial situation.

Contribution amounts and tax treatments stand out

Fact checked by Jared Ecker

Roth IRAs and traditional 401(k)s are popular retirement savings options. Even though the end goal is the same, these options both offer very different tax benefits and have distinct requirements. Utilizing one or both of these investment vehicles to prepare for retirement can be quite advantageous, and making the most of their benefits requires understanding the differences between how each works. We will take an in-depth look at both types of plan to help you understand the intricacies of each. That will help you decide which type of retirement savings would be best for you.

Key Takeaways

• Roth IRAs and traditional 401(k)s both provide tax-free growth year by year once money is invested in them.
• Contributions to a Roth IRA do not entitle the account owner to a tax deduction in the year of contribution. Contributions are made with money left over after tax has been paid and are known as after-tax contributions.
• A traditional 401(k) account is funded with pre-tax money, which entitles the account owner to a tax deduction for the contribution amount in that year. 
• Anyone can open and contribute to a Roth IRA as long as their modified adjusted gross income (MAGI) meets certain income eligibility limits.
• A 401(k) is an employer-sponsored retirement plan in which many employers offer matched employee contributions up to a certain level. 
• Required minimum distributions (RMDs) are not mandatory from a Roth IRA
• Required minimum distributions generally must begin from a 401(k) by age 73, but you can delay the start if you’re still working at that workplace. 

Understanding Roth IRAs

A Roth IRA is a specific type of individual retirement account (IRA) in which you contribute after-tax dollars and enjoy tax-free growth of your investments. Because you are investing money on which you have already paid tax, you will not get an upfront tax deduction for your contribution. However, this also means that when you withdraw the funds during retirement you will not pay taxes on the earnings if you are at least age 59 ½ and have owned this or another Roth IRA for at least five years; the five-year clock starts January 1 of the year of your first contribution. 

Because you are investing with after-tax funds, you can withdraw Roth IRA contributions tax-free at any time and age, if necessary. The right to withdraw Roth IRA earnings tax-free after you’ve owned the Roth IRA for at least five years and you are 59 1⁄2 can be especially beneficial if you end up in a higher tax bracket during retirement. It is important to note that you are never required to take a distribution from your Roth IRA. In this way, investing in a Roth IRA can also be a useful estate planning tool. Not only are required minimum distributions (RMDs) not mandatory, but you can pass along the account tax-free to your beneficiaries someday.

Required minimum distribution rules do apply to any heirs, but their withdrawals would be tax-free. Still, a Roth IRA inherited by a non-spouse must be emptied within 10 years, although no distributions are required until the tenth year. A spousal beneficiary of an inherited Roth IRA can either take distributions based on their own life expectancy (starting the year after the owner’s death) or empty the account within 10 years of the owner’s death.

Contribution Limits and Rules

• Married joint filers or qualifying surviving spouses, with a modified adjusted gross income (MAGI) of at least $236,000 (up from $230,000 in 2024): You can’t make a Roth IRA contribution if your MAGI is $246,000 (up from $240,000 in 2024) or more.
• Singles, heads of household, or marrieds filing separately and you didn’t live with your spouse at any time in 2025 and your modified AGI is at least $150,000 (up from $146,000 in 2024): You can’t make a Roth IRA contribution if your MAG is $165,000 (up from $161,000 in 2024) or more.
• Marrieds filing separately is the same for 2025 as it was for 2024—you lived with your spouse at any time during the year, and your modified AGI is greater than $0: You can’t make a Roth IRA contribution if your modified AGI is $10,000 or more.

Investment Options and Flexibility

A Roth IRA is an individual retirement account that you can set up on your own, regardless of whether you work for an employer or you are self-employed. Because it is an individual account, you invest directly through a brokerage—which provides you with many investing options. Your only investment limit is determined by the investment options that your brokerage offers. Typically, your Roth IRA can invest in any of the following:

• Stocks
• Bonds
• Mutual funds
• ETFs
• Cryptocurrency
• Options
• REITs
• Money market funds
• Alternative investments

Understanding 401(k)s

A traditional 401(k) is an employer-sponsored retirement plan. This means that only active employees of a company are eligible to participate. With this type of retirement plan, employees can elect to contribute pre-tax dollars for investment, thereby lowering their current taxable income. Because you get a tax break for the year you contribute, you will pay taxes on earnings when you withdraw the funds, which customarily happens in retirement. This type of retirement plan is especially beneficial to people who expect to be in a lower tax bracket during retirement. When investing in a 401(k) plan, you will generally be required to start taking minimum distribution amounts at age 73.

One of the biggest benefits to participating in a 401(k) plan is that many companies offer a matching contribution up to a certain percentage. For example, if an employee contributes 3% of each paycheck, some employers match that portion for a total of 6% going into the employee’s retirement account. Companies that match often match different amounts, so make sure you know how much your employer offers. Additionally, companies may have rules for vesting schedules regarding employer contributions and the time frame in which an employee will be fully vested in those contributions.  

Contribution Limits and Employer Matching

The 401(k) contribution limit for 2025 is $23,500 (up from $23,000 from 2024) for employee salary deferrals, and defined contribution limits of $70,000 for 2025 (up from $69,000 for 2024) for the combined employee and employer contributions. The limit on total employer and employee contributions for 2025 is $77,500 with catch-up contributions for members aged 50 through 59 or 64 and older, or $81,250 for plan members aged 60 through 63, if your plan allows. The annual compensation limit for 2025 is $350,000 (up from $345,000 in 2024).

The catch-up contribution of up to $11,250 for people ages 60 through 63 is a new change for 2025, making eligible employees’ maximum contribution levels for 2025: 

• $31,000 for ages 50 and older
• $34,750 for ages 60 through 63

Depending on your plan, you may be able to make post-tax contributions beyond the pretax and Roth contribution limits, however the total contributions cannot exceed your annual employee compensation. 

Investment Options and Flexibility

Investing in your employer’s 401(k) plan makes it easy to set aside money for retirement. Most companies will help you set up automated deductions that come right out of your paycheck and go directly into the company sponsored retirement plan. If your employer offers a contribution matching program,it is advantageous to invest through the 401(k) plan because you are getting additional money added to your retirement account by your employer. That helps you save at a faster rate and enjoy the benefit of compound growth over time. 

While the process of investing in your employer’s 401(k) program is convenient, you are limited to the investments that are offered by the plan. Most employer-sponsored 401(k) plans offer employees limited selections of investments, which are intended to be suitable for all plan participants. The investments range from long-term growth securities to assets focused on short-term stability:

• Mutual funds
• Growth stocks
• Value stocks
• Bonds
• Stocks—it is somewhat rare that individual stocks are offered in a 401(k) plan; however, some publicly traded companies offer their stock to employees
• Money market funds

Factors to Consider Choosing Between a Roth IRA and 401(k)

There are benefits to both types of retirement savings plans. Participating in your employer’s 401(k) may allow you to boost your retirement savings by taking advantage of your employer’s matching contribution program. It also gives you the benefit of using pre-tax money to invest and enjoying tax-deferred growth on your investments. A Roth IRA can also be very beneficial. It can provide years of tax-free growth of your investments, although you do not get an up-front tax deduction because you are investing using after-tax dollars. If you expect your tax bracket during retirement to be higher than it is now, then a Roth IRA can be good for you. If you expect your bracket to be lower than it is now, then a traditional 401(k) is a sweet deal.

The Bottom Line

The key difference between a Roth IRA and a 401(k) is when you get your main tax break. You must decide if it is more meaningful to you to get a tax break now in the form of an up-front tax deduction for your contribution. If so, then contribute to a 401(k) with pre-tax money and pay tax during retirement. On the other hand, if it is more advantageous to invest using after-tax dollars now and enjoy years of tax-free growth plus tax-free withdrawals, use a Roth IRA. Another major consideration is whether you want to pass the investment along to your heirs. If so, a Roth is a better tool. The retirement vehicle that is best for you will depend on your specific financial situation. You may find it beneficial to consult with a tax professional or financial advisor to help you weigh your options and put a plan in place.

Since its beginnings in 2010, Instagram has evolved as a photo-sharing app to become a social media powerhouse with 2 billion monthly active users worldwide. While Instagram started as a platform for sharing personal moments and filtered photos, it has transformed into an essential business tool used by both small startups and Fortune 500 companies for marketing, customer engagement, and direct commerce.

Key Takeaways

• Instagram has evolved from a photography app into a major social media platform with 2 billion active users.
• Unique features like filters and editing tools distinguish Instagram from other platforms.
• Businesses use Instagram for marketing through business accounts and advertising.
• A consistent content strategy is crucial for success on Instagram.
• Instagram Shopping allows users to make purchases directly from the platform.

History and Growth

Instagram was originally conceived as Burbn, a location-based check-in platform created by Kevin Systrom and Mike Krieger. Realizing how photo-sharing was growing in popularity, they pivoted their focus and renamed the app Instagram, a portmanteau of “instant camera” and “telegram.”

Instagram launched in October 2010 and immediately gained traction, amassing about 25,000 users on its first day. Its focus on mobile photo sharing and its suite of image-enhancing filters quickly brought users on board. Within three months, Instagram had already surpassed one million users.

Instagram expanded at a breakneck pace. By April 2012, Instagram was acquired by Facebook, now Meta Platforms, Inc. (META), for $1 billion, just a month before Facebook’s initial public offering. The new funding accelerated Instagram’s development, and soon it was part of a broader ecosystem of social media products. Today, Instagram has more than 2 billion active users.

Below is a timeline of the major changes to the platform over time:

Key Features of Instagram

Instagram’s success lies in how it blends visual storytelling and user-friendly features. Here are the major aspects of the platform today:

Visual-First Approach 

Instagram’s foundation remains its visual-centric nature, now enhanced with immersive features. The platform has expanded beyond static images to embrace audio and video through Stories and Reels, offering users diverse ways to share their narratives while keeping Meta competitive with TikTok.

Reels

As Instagram’s answer to short-form video content, Reels has become a primary engagement driver. Key aspects include the following:

• 60-second clips with interactive elements
• Augmented reality (AR) filters for enhanced creativity
• Live product tagging for seamless shopping
• Reel replies, which let businesses respond with video demonstrations

Interactive Features 

Instagram has pushed forward some notable community-building tools:

• Interactive polls in Reels for audience engagement
• Global communication support with translation features
• Content testing capabilities through trial reels
• Improved messaging features for direct communication

AI Integration

The platform’s signature filters and editing capabilities have evolved into tools powered by artificial intelligence (AI). Users can access features like “Movie Gen,” which enables dramatic video transformations through text prompts—from altering clothing to backgrounds or converting videos into animated styles. Users can also employ AI for the following:

• Automated performance insights
• Optimizing content visibility
• Image-to-video conversion

Instagram for Business

Instagram is an essential marketing and sales platform for many businesses. With improvements in profile features, companies can now offer immersive AR product demonstrations, use Meta’s AI to predict trends, and employ Instagram Shopping to integrate e-commerce possibilities. Detailed analytics provide crucial data on audience demographics, content performance, and engagement rates, while newer ad formats help target specific audiences.

Content Strategy and Engagement

The platform rewards content that drives meaningful interaction, with carousel posts and reels typically generating higher engagement rates. Strategic hashtag use remains crucial, with popular tags like “#Love” garnering over 2 billion posts.

Navigating Algorithm Changes

Brands using Instagram face the challenge of an ever-evolving algorithm. The algorithm that determines content visibility isn’t one-size-fits-all; Instagram uses different algorithms for feed posts, stories, the explore page, and reels. Understanding these distinctions is crucial for business success on the platform:

Feed posts:

The main feed prioritizes content based on user relationships and past interactions, engagement rates (likes, comments, saves, and shares), content relevance to user interests, and recency.

Instagram has placed renewed emphasis on photo content in the main feed following Instagram leader Adam Mosseri’s announcement about rebalancing content types. This shift is a time for brands to diversify their content strategy beyond just video. 

“This is definitely a work in progress—balancing the ability to reach followers and overall engagement is tricky,” Mosseri posted on Threads, Meta’s answer to Twitter (now X). This message served as a warning for content providers: The algorithm will be changing, and if your business relies on it, you’ll need to change with it.

Stories:

Stories visibility is determined by the viewing frequency of a creator’s content, the level of interaction with the account, relationship depth (including direct messaging), and content completion rates.

Explore page:

The explore page algorithm focuses on content that receives high engagement (particularly saves and shares), posts that align with users’ demonstrated interests, trending topics and hashtags within specific niches, and location relevance

Reels:

For reels, the algorithm prioritizes the following watch time and completion rates, user engagement patterns, audio track popularity, and content originality.

The Bottom Line

Instagram’s transformation from a simple photo-sharing app to a global commerce and communication platform reflects broader shifts in how businesses connect with consumers. Through AI-powered features, enhanced shopping capabilities, and sophisticated analytics, Instagram has become an essential tool in modern business.

While challenges exist—from algorithm changes to content saturation—Instagram’s ability to adapt suggests it will continue to dominate social media. For those willing to invest in authentic content creation and community engagement, Instagram will remain a place where you can connect with and convert audiences.

Fact checked by Vikki Velasquez

Stock volume is an important indicator that shows market sentiment towards a particular stock. It measures the total number of shares that were bought and sold during a specific time period, providing you with important information that could improve your trading decisions. 

Once you understand how to read stock volume, you will be able to track investment trends, spot possible reversals, and make smart inferences about the overall health of the market, making you a more confident trader. 

In this article, you will learn how to interpret stock volume data, read multiple volume indicators, and learn how to avoid common trading mistakes.

Key Takeaways

• Stock volume provides a snapshot of current market activity and price trends.
• Knowing how to read various indicators will help you understand trends in the overall stock market. 
• Avoid common pitfalls, such as overreacting to single-day volume spikes, by looking at long-term market trends.

What Is Stock Volume?

Stock volume is the total number of shares that are traded, usually within a single day. Stock volume is measured by counting the total number of shares that are transacted between buyers and sellers, also called absolute volume.

Relative volume, on the other hand, compares the current trading volume against the stock’s average volume over a certain time period, such as 30 or 60 days.

Find real-time trading data on broker and trading platforms like Charles Schwab, Fidelity, and Interactive Broker. For financial news, visit websites like Bloomberg, MarketWatch, and Yahoo! Finance. 

Why Stock Volume Matters in Trading

Stock volume is important because it tells you how interested people are in a particular stock. When a stock has a high trading volume, it indicates a strong interest as people are actively trading the stock. If a stock has a low trading volume, it indicates less public interest and slower investing activity.

Traders often look at stock volume alongside the stock’s price action or the daily fluctuation of a stock’s price. If a stock price closes at a higher price than it opened at the end of a trading day, it indicates an upward trend. If a stock closes for less than it opened, it’s in a downward trend. 

When a stock price changes direction, it’s referred to as a reversal. 

Key Volume Indicators and How To Use Them

Key volume indicators are tools that help you analyze market activity to make more informed trading decisions. Here are a few indicators that will make you a more confident trader: 

Volume Moving Average 

The volume moving average (VMA) is a time-based indicator that assumes all trading days are equal, smoothing out volume data over a specific time period to help identify normal vs. abnormal trading activity. The VMA creates an average price that is constantly being updated. 

On-Balance Volume

On-balance volume (OBV) is a trading indicator of momentum that uses volume flow to predict how a stock’s price will change. OBV calculates this by adding a stock’s volume on up days and subtracting it on down days to indicate how strong a trend is.

Volume-Weighted Average Price

The volume-weighted average price (VWAP) is a foundational concept in trading that shows you the price action throughout a single day, giving you insight into the overall price trends. 

Tip

Volume-weighted average price is a helpful indicator for short-term traders. 

Accumulation/Distribution Line

The accumulation/distribution line (A/D) is used to see how money flows in and out of a stock, helping traders see how strong a trend is, and the pressure to buy and sell that stock. Do not confuse this with the advance/decline index, which uses the same initials. 

Volume Spikes and Climax Moves

Volume spikes and climax moves happen when there is a sudden increase in trading volume or price movements, signaling to investors there is a potential trend exhaustion or reversal. 

How To Use Volume To Improve Your Trading Strategy

Understanding how to read a stock’s volume will not only make you more informed but also help you improve your trading strategy. Here are a few tools to add to your trading strategy tool belt: 

Confirming Breakouts and Breakdowns 

Take advantage of potential trading opportunities and avoid losses by knowing how to spot a breakout and a breakdown. When a stock moves past a defined price level, high volume indicates that the move is strong and will likely continue. This is known as a strong breakout.

Note

A breakdown occurs when a stock’s price moves downward, usually with high trading volume, signaling a fast decline that is likely to continue. 

Spotting Trend Reversals

If a stock’s price is rising but volume is going down, it could be a warning signal that the trend is losing strength and could reverse soon.  

Identifying Market Strength and Weakness

Look at trading volume over various time periods to see how strong a market move is. High volume over time indicates strong interest, while low volume could indicate a stock is losing steam. 

Timing Entries and Exits

Market timing is an important part of every trader’s strategy, and stock volume can help you decide when it’s a good time to buy or sell. The key is to enter a trade when volume supports the general trend and consider existing if volume suggests a change is coming. 

Common Mistakes Traders Make With Volume

There are some common mistakes that traders make when they first begin tracking stock volume. 

Misinterpreting a price change on low-volume stocks as significant, when the change is in fact not sustainable due to a lack of strong market interest. 

Ignoring other technical indicators outside of stock volume, like price patterns and moving averages, and basing your investment decisions solely on volume. This can lead you to have an incomplete picture of a stock’s performance. 

Overreacting to a single-day volume spike. A spike could be caused by a number of temporary factors rather than a reflection of a true shift in market sentiment, so look at the broader context and market activity before panicking. 

What Other Indicators Can Be Used With Volume?

Other indicators that can be used to track stock volume include the Chaikin Money Flow, Klinger Oscillator, Relative Strength Index (RSI), Bollinger Bands, and Moving Average Convergence Divergence (MACD). 

How Much Volume Is Good for Trading?

High-volume stocks trade at more than 500,000 shares per day, while low-volume stocks trade below this threshold, though there is no officially established cutoff.

What Is the Formula for Trading Volume?

Trading volume equals the total number of shares traded during a specific time period. 

Is Low Trading Volume Bad?

Trading low volume is often seen as more risky due to low liquidity, but it can also have some benefits and result in profit if done strategically.

The Bottom Line

Stock volume is an important tool for understanding market activity and helping you make informed investing decisions. If you want to use stock volume effectively, learn how to spot trend reversals, strategically time your entries and exits, and use volume to confirm breakouts and breakdowns. 

It’s important to combine volume analysis with other trading tools to have a comprehensive view of the market and help you make informed decisions. Consider tools like moving averages, RSI, and MACD, and keep up with stock volume changes on financial websites and brokerage platforms. 

Once you know how to use stock volume, the next step is to use volume-based strategies by monitoring volume patterns on a regular basis, staying updated on market trends, and continuing to adapt your approach. 

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimer for more info.

The Family and Medical Leave Act (FMLA) is a federal law providing eligible employees up to 12 weeks of unpaid, job-protected leave per year. The law allows employees to take time off for qualified family and medical reasons and still keep their jobs and health benefits. 

The Department of Labor (DOL) has optional certification forms, but your employer may have its own paperwork for certification or to document your leave. Some forms only need to be filled out by your employer or healthcare provider, but others ask you to provide basic details about your situation.

Key Takeaways

• FMLA gives eligible employees up to 12 weeks of unpaid, job-protected leave for bonding time after birth or adoption, serious health conditions, caregiving responsibilities, or military-related family needs.
• Employers may require certification to verify the need for leave but can’t demand a medical diagnosis or extra details beyond what FMLA requires.
• Mistakes in FMLA paperwork, such as unprovided details or vague medical certifications, can lead to denials.
• You can correct and resubmit forms or challenge a denial if necessary.

Understanding FMLA Eligibility

The four main FMLA eligibility criteria relate to your employment history and your employer’s company characteristics. According to the Department of Labor, you’ll need to meet these requirements: 

1. Work for a covered employer: Private employers must have had 50 or more employees in the 20 or more workweeks in the current or previous calendar year.
2. Have worked for that employer for at least 12 months before your FMLA leave starts: The 12 months don’t have to be consecutive; any combination of 52 weeks total is acceptable.
3. Have 1,250 hours of service for the employer in the 12 months immediately before your FMLA leave starts (about 24 hours per week for 12 months): PTO doesn’t count toward your hours of service. 
4. Work for an employer that employs at least 50 people within 75 miles of that worksite as of the date you give notice about your need for FMLA leave: If you work from home, your worksite is where you report to or receive assignments from. If you have no fixed worksite (like construction workers), then it could also be the location assigned as your home base.

Types of FMLA Leave

Parental, medical, caregiver, and military family leave are the four types of FMLA leave. Below is a closer look at each type of leave. 

Note

You must generally give your employer at least 30 days’ notice, except in cases of emergency. 

Parental Leave

You can apply for parental leave within one year of your child’s birth. This covers the birth itself and bonding with your baby. You also have one year to apply to take parental leave to bond with a child placed with you for adoption or foster care. 

Medical Leave for Personal Health

Medical leave for personal health reasons is reserved for serious health conditions that temporarily prevent you from performing your job or regular daily activities, whether because of the condition or its treatment. 

These are illnesses, injuries, impairments, or mental or physical conditions requiring overnight hospital stays or continuing treatments. Examples include pregnancy-related issues, chronic conditions like diabetes and asthma, or permanent conditions like terminal cancer. 

Your employer may ask for medical certification, which is a verification from your doctor that you have a serious health condition. 

Important

Elective surgeries with overnight hospital stays are classified as a serious health condition.

Caregiver Leave

Caregiver leave is FLMA leave taken to care for an immediate family member’s health condition. It generally applies only to your spouse, children, and parents but also includes children you financially support or provide day-to-day care for. 

You’ll have to meet additional criteria if your child is 18 or older. For instance, they may need to have a serious health condition and be unable to care for themselves because of the condition. 

Military Family Leave

Military family leave is another type of caregiver leave, except it’s to provide care for a serious condition arising from the family member’s military service. The family under this leave is defined as your spouse, child, parent, or next of kin. You can take up to 26 workweeks of leave instead of the usual 12. 

Qualifying exigencies also let you take time off to handle urgent or personal family matters resulting from your spouse, child, or parent being deployed for active duty. 

Unlike caregiver leave, your child can be of any age for both these types of leave.

How to Get FMLA Forms

Your employer may use the Department of Labor’s optional FMLA forms or their own, which you can get from its Human Resources (HR) department. Some employers use a third party, such as an insurance company, to handle FMLA requests. 

Note that there is no legal requirement to fill out any particular form. “Your employer has to accept a request that meets all the certification requirements,” said Michal Shinnar, senior counsel with Joseph Greenwald & Laake, a law firm that operates in Maryland, Virginia, and the District of Columbia. “Employers are allowed to accept less than the certification information; they just can’t require more to approve FMLA.”

Note

Your employer can’t request medical certification for parental leave to bond with a child. They can only ask you to confirm the family relationship by providing a court document or birth certificate. 

How to Complete FMLA Forms

FMLA forms have up to three sections to complete: one for your employer, one for the healthcare provider, and usually one for you. Form WH-380-E, used for a serious health condition, is the only one that doesn’t have anything for you to fill out. Your employer fills out the top part, and your healthcare provider fills out the second part. 

Here are more details on how to fill out these forms.

Fill in Section 2: Personal Information and Reason for Leave

Section 2 varies depending on the form:

FMLA Form WH-380-F for Family Health Condition

Section II of this form asks for your family member’s details. You’ll need to know:

• Their name and relationship to you
• The type of care you’re providing and how much time off you need

FMLA Form WH-384 for Military Family Leave for Qualifying Exigency

Section II of this form asks you to detail why you’re requesting leave and provide proof of the military family member’s order or military documentation proving they’re on active duty or have been called to active duty. This is the lengthiest section 2 of all the forms. 

Initially, you’ll need to fill out their full name and describe your relation to them.

Part A then asks for their active duty service dates and the type of documentation you’re providing as proof. 

Part B asks for which of the qualifying reasons you’re asking for leave and if there’s documentation that supports the reason for the leave. 

Part C is where you detail your leave or reduced work schedule, including your best estimates of how long it will last and whether it will be a continuous or intermittent absence.

Part D is where you provide your contact information and sign the form.  

FMLA Form WH-385 for Servicemember Care

This form starts by asking for your and the service member’s name and how you’re related. 

Part B is where you detail the service member’s status, what care you’re providing, and your best estimate of how long you’ll need the leave or reduced work schedule. 

FMLA Form WH-385-V for Veteran Caregiver Leave

Part A of this form asks for the veteran’s name, your name, and your relationship to them.  

In Part B, you’ll provide more details about:

• The veteran’s service
• Whether they are receiving medical treatment
• How you will care for them
• Your best estimate of how long you’ll need the leave or reduced work schedule. 

Get a Healthcare Provider’s Input

Your healthcare provider will fill out the healthcare provider section on the forms. “When asking a doctor to complete an FMLA medical certification, it’s best to schedule an appointment or check their process in advance with their office,” said Stephanie Reitz, director of client services at myHR Partner. You should clearly explain why you need the leave and give your medical provider the correct form, she said. Before you leave the office, make sure all questions are answered. 

The DOL has a handout for healthcare providers that you can print and bring to your appointment. 

Note

Your doctor doesn’t have to include your diagnosis, and your employer can’t reject your certification only because it lacks one. 

Be prepared that you may have to pay something for this service. “Some healthcare providers charge a fee for FMLA paperwork, usually because insurance doesn’t reimburse for this time,” said Shinnar. Ask ahead if yours does and, if so, how much they charge.

Turn in the Form and Wait for Approval

Return any forms and documentation to your employer or HR department. Don’t send them to anyone else, including the DOL or your supervisor.

“You are entitled to your medical privacy when it comes to FMLA leave, just like under the [Americans With Disabilities Act],” Shinnar said. “Your supervisor gets to know the ‘what’ (i.e., when you will be on leave), but not the ‘why’ (i.e., what the medical conditions or specific symptoms are).”

Your employer may use the WH-382 Designation Notice form to let you know if your request was approved. If denied, they can use this form to tell you whether the certification was incomplete or if additional information is needed. 

What If Your Request Is Denied? 

If you want more clarification about your denial, ask your human resources representative for a detailed written explanation, Reitz said. You may need your physician to update and resubmit the form or get a second opinion.

If you feel the denial was unfair, you do have legal options. You can submit a complaint to the U.S. Secretary of Labor or file a civil lawsuit. The lawsuit must be filed within two years after the denial—or three years if you can prove the employer’s violation was willful. “An attorney can provide you with more specific advice,” said Shinnar. “Best practice is to mark your calendar for the two-year deadline to avoid having to prove a violation was willful.”

Common Mistakes and Tips for Accurate Form Completion

Reitz said that, in her experience, denials usually happen because of problems with medical certification. “The information provided in the request is too vague or incomplete, such as missing specifics related to how long the needed leave is or whether the leave will be intermittent or taken all at once,” she said.

Another common mistake is saying that you’ll be out for more than 12 weeks when that’s not definitely the case. Your employer doesn’t have to hold your job if you’re out for more than 12 weeks.

The Bottom Line

Most FMLA leave forms require you to fill out a section on your own, with your medical provider and employer filling out the rest. These forms are optional but may be part of your company’s standard procedure.

If you qualify, you can take unpaid leave for the time specified, up to 12 or 26 weeks, depending on your type of leave. A few states are implementing their own paid family and medical leave policies, although policies vary by state.

Reviewed by Chip Stapleton
Fact checked by Vikki Velasquez

If you live and work in the U.S. on a visa, you may be considered a non-resident alien. The Internal Revenue Service (IRS) defines a non-resident alien as a non-U.S. citizen who is legally present in the U.S. without a green card or who doesn’t pass the substantial presence test.

As a non-resident alien, you may invest in a 401(k) offered by your employer. But, this can be complicated if you deplete your account when you return to your home country because you will be taxed and penalized. Keep reading to learn how to solve this non-resident 401(k) conundrum.

Key Takeaways

• The early withdrawal rules for retirement accounts are the same for U.S. residents and non-residents.
• Your entire 401(k) withdrawal is taxed as income by the U.S. even if you’re back in your home country when you withdraw the funds.
• If you’re a non-resident with a 401(k) and plan to return to your home country, you can cash it out, do an IRA rollover, or leave the funds until you turn 59½ and take penalty-free withdrawals.

Cashing Your Funds Out

The rules for early withdrawals are the same for U.S. residents and non-resident aliens. According to the Internal Revenue Service, you can’t withdraw money from a traditional or Roth 401(k) plan until you reach age 59½ or become permanently unable to work due to disability.

Beware the Early Withdrawal Penalty

If you are younger than 59½, not disabled, and take cash from your 401(k), you’ll be subject to a 10% early withdrawal penalty. So, if your 401(k) is worth $15,000 and you decide to liquidate the account, you’ll be required to pay an additional $1,500 in taxes. That means your withdrawal is essentially slashed to $13,500.

Your entire 401(k) withdrawal is taxed as income by the U.S. even if you return home. Because contributions to traditional 401(k) accounts are made with pretax dollars, this means any withdrawals are included in your gross income for the year you take the distribution.

Let’s say your income tax rate is 22% in the year you liquidate your 401(k). This drives the total tax impact up to 32% for that withdrawal (the 10% early withdrawal penalty + the 22% income tax rate).

So when you withdraw $15,000 from your 401(k), you’ll have to pay a total of $4,800 in taxes, which whittles down the total of your take-home amount to $10,200. This is precisely why many financial advisors tell U.S. residents that cashing out their 401(k) before they hit 59½ isn’t the smartest option.

The Delaying Game

A tax expert may offer different advice if you’re a non-resident planning to return home. If you move back and wait until the next tax year to cash out your 401(k), you will most likely fall into a lower tax bracket since you won’t be working and earning income in the U.S.

This could greatly reduce the amount of income tax owed on the distribution. Remember: No matter where you live when you cash out your account, you’ll still have to pay the 10% early withdrawal penalty if you’re younger than 59½. 

Warning

As a non-resident alien, the IRS requires you to pay income tax only on the money you earn from a U.S. source.

Rolling Your Funds Over

Another way to lower your tax payment on a 401(k) withdrawal is to transfer the funds to another tax-advantaged account, such as an individual retirement account (IRA). When you take a direct rollover from your 401(k) to an IRA, you avoid the 10% early withdrawal penalty. To pull this off, you’ll need to open the IRA first and fund it with the 401(k).

The Penalty-Free Withdrawal

You still incur the early withdrawal penalty but there’s “more flexibility in terms of exceptions for avoiding the penalty like unreimbursed medical expenses, first-time homebuyer, disability” if you take a distribution from your IRA before 59½, according to Mark Hebner, founder, and president of Index Fund Advisors and author of “Index Funds: The 12-Step Recovery Program for Active Investors.”

You can make a penalty-free early withdrawal from an IRA for qualified higher-education expenses, such as tuition, books, and supplies for enrollment at an eligible institution–plus a specified amount for room and board if you attend at least half-time. The IRS notes that some overseas educational institutions participate in Federal Student Aid programs so check with the school first to see if it is considered an eligible educational institution.

Keep in mind that IRA distributions sent to an address outside of the U.S. are subject to mandatory federal withholding of 10%. However, some financial institutions allow you to waive this withholding by filing special documents. If you take this route, your distribution will be subject to the treaty rate of your current country. The treaty rate ranges from zero to 30%.

The Home Country Option

Once you roll your 401(k) into an IRA, you may also choose to transfer the IRA funds to a retirement account in your home country. For example, Canadian citizens can roll over their U.S. IRA plans to a registered retirement savings plan (RRSP). As a Canadian resident, not only do you end up with the 10% early withdrawal penalty if you aren’t 59½, but you’ll also have to pay taxes to both the U.S. and Canada.

Do Non-Residents Qualify for 401(k) Participation?

Non-residents who work for a U.S. employer may qualify for a 401(k) if the plan allows it. There may be certain eligibility requirements, including earning income from a U.S.-based source. Contribution and distribution rules apply to citizens, residents, and non-residents alike.

How Does the IRS Define a Non-Resident?

According to the IRS, a non-resident is anyone who isn’t a U.S. citizen or a legal permanent resident. People who fall into this category don’t have a green card or pass the substantial presence test. Non-residents must pay taxes if they receive income in the U.S. from an employer or through a business. Tax rates for non-residents are similar to citizens and green card holders.

Can I Keep my 401(k) If I Leave the US?

Yes, you can have a 401(k) and keep it as is if you leave the U.S. If you decide to cash out your account before you turn 59½, though, your distribution is taxed as income at your normal tax rate and you will incur a 10% early withdrawal penalty along with a 30% federal withholding. You may also be liable for taxes in your home country if it applies.

The Bottom Line

Withdrawals from 401(k)s are taxed the same way for residents and non-residents. If you plan to return home, you can cash out the account, roll it over into an IRA, or leave the funds until you turn 59½ and can start taking penalty-free withdrawals.

“Although you are allowed to leave your funds in the 401(k) until turning age 59½ or later, the funds would be subject to your employer’s options and fees,” says Carlos Dias Jr., founder and managing partner of Dias Wealth. It is also important to note that some investment firms are reluctant to have an investment account held by an individual no longer living in the U.S.

Before you make this important decision regarding your 401(k) withdrawals, consider speaking with a financial professional or tax attorney.

The March 2023 collapse of Silicon Valley Bank shone a light on how a bank’s financial vulnerabilities, when left unaddressed, can lead to ruin. The bank, the 16th largest in the United States, was shuttered after rising interest rates caused its investments to plunge in value and depositors withdrew huge amounts of cash.

Management errors, investment missteps, market volatility, and regulatory changes all turned a financial success story into a 21st-century disaster. At the time, it was the largest bank failure since Washington Mutual closed its doors during the 2008 financial crisis.

Federal regulators took extraordinary steps to prevent a widespread financial contagion in the market, and subsequent regulatory measures have reduced the risk of similar bank failures in the future.

Key Takeaways

• Silicon Valley Bank catered to tech and bio-tech startups, the vast majority of whose deposits were larger than the $250,000 insured by the FDIC.
• The bank invested heavily in long-term securities, which tanked in value when interest rates rose in 2022 and had to be sold at a loss when depositors lost faith in the bank.
• On a single day in March 2023, depositors withdrew $42 billion from the bank, leading to its shut-down the next day.
• The FDIC applied the systemic risk exception rule to cover insured and uninsured Silicon Valley Bank deposits.
• Poor risk management, lax federal regulation, and the rapid spread of information on social media platforms all played a role in the bank’s failure.

What Was Silicon Valley Bank?

Silicon Valley Bank (SVB) was a subsidiary of Silicon Valley Bank Financial Group (SVBFG), a bank holding company, financial holding company, and financial services company. Silicon Valley Bank was a state member bank of the Federal Reserve System, which held the lion’s share of SVBFG’s assets.

SVBFG provided commercial and private banking services to the life sciences and technology sectors, including a substantial number of early stage startup companies and venture capital-backed firms. The financial group derived nearly all its revenue from American clients.

“By the first quarter of 2022, its total assets peaked at $218 billion, ranking it as the 16th largest bank in the United States,” said Dr. Lai Van Vo, associate professor of finance at Western Connecticut State University. He pointed out that by 2023, SVB was on Forbes’ list of the world’s best banks, saying the publisher cited “its robust growth, strong credit quality, and profitability as evidence of its industry prominence and stability.”

History of Silicon Valley Bank

In 1983, Bill Biggerstaff and Robert Medearis founded Silicon Valley Bank in Santa Clara, California, after conceiving the idea while playing poker.  With CEO Roger Smith at the helm, SVB sought to provide banking services and credit to Silicon Valley-based tech startups. The first year, SVB held around $18 million.

Between 2019 and 2021, SVB experienced tremendous growth, and its parent company tripled in size due in part to low interest rates. Deposits increased substantially in 2021 as SVB clients got additional funding through acquisitions, initial public offerings (IPO), secondary offerings, special purpose acquisition company (SPAC) fundraising, and venture capital investments. By the end of 2021, the financial group’s assets had grown 271%, compared to 29% in the overall banking industry.

Why Did Silicon Valley Bank Fail?

A major turning point for the bank was 2022, when the Federal Reserve hiked interest rates, squeezing growth throughout the technology sector. Although the financial group’s deposits decreased in 2022, it still reported record high total assets–nearly $212 billion–for the year. However, by the end of that year, around 94% of SVB’s deposits were uninsured, making them more vulnerable to a bank run.

During a two-day period in March 2023, depositors’ substantial withdrawals made Silicon Valley Bank insolvent. On March 10, 2023, federal regulators shut down its operations.

Investment Losses

The financial group invested a large percentage of its deposits in long-term bonds and mortgage-backed securities with a maturity of 10-plus years. “Substantial investments in debt securities in 2021, made during a period of low interest rates, triggered significant losses when rates spiked in 2022,” Vo said. “A depositor base heavily concentrated among interconnected venture capitalists heightened the risk of a bank run, especially as the bank’s performance weakened.”

As interest rates rose, the value of SVB’s bond portfolio fell. When the financial group liquidated $21 billion in bond holdings, its losses came to light and sparked depositor withdrawals. 

Bank Run

Silicon Valley Bank clients continued to take their money out throughout the first quarter of 2023. Slow growth within the technology sector prompted the bank’s parent company to inform investors that it expected reduced growth and income for the fiscal year. Additionally, the financial group advised investors that it expected credit rating companies to downgrade its credit status. Customers took these announcements as signs SVB was severely distressed financially, and the withdrawals spiked dramatically.

On March 9, 2023, SVB depositors withdrew $42 billion. Bank supervisors reported that they expected depositors to remove more than $100 billion by March 10. Since SVB was heavily invested in long-term securities with low interest rates, it did not have the capital or collateral to meet the outflows. On March 10, the California Department of Financial Protection and Innovation deemed SVB insolvent and appointed the Federal Deposit Insurance Corporateion (FDIC) to oversee its assets and liabilities.

Regulatory Environment

Following the 2008 financial crisis, Congress passed the Dodd-Frank Act. The law’s provisions sought to prevent financial institutions from engaging in the types of risky activities that created that catastrophe. The new law also required financial institutions that held $50 billion or more in consolidated assets to undergo annual Federal Reserve-supervised stress tests—and semiannual in-house stress tests—to help identify risks that could threaten their solvency.

In 2018, Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, also called the Crapo bill after its author, Republican Senator Mike Crapo of Idaho.  It modified the Dodd-Frank Act and increased the $50 billion stress test threshold to $250 billion in consolidated assets. At the end of 2022, SVB reported total assets of $212 billion, placing its holdings below the newer stress test threshold. 

“Inadequate risk management exacerbated these vulnerabilities,” Vo said. “Ultimately, this mismanagement of assets and liabilities, compounded by weak corporate governance, led to the bank’s failure.”

Who Was to Blame?

In its April 28, 2023, press release, the Federal Reserve’s Board of Governors concluded that  Silicon Valley Bank fell into insolvency due to:

• Poor internal risk management
• Failure of the Federal Reserve to understand SVB’s vulnerabilities
• Failure of SVB supervisors to quickly address vulnerabilities when they were discovered
• Reduced standards and supervision created by the Crapo Act. 

The Federal Reserve also noted that the rapid spread of information through social media networks exacerbated the speed and severity of deposit outflows.

A Timeline of the Collapse

Over a period of months, market conditions increased SVB’s vulnerability, but its collapse occurred within the course of just a few days:

• March 8, 2023: SVBFG announced a $1.8 billion loss on its bond holdings and informed investors that it projected lower-than-expected earnings for the fiscal year. The news quickly spread on social media networks, prompting uninsured depositors to withdraw their funds from SVB.
• March 9, 2023: SVB customers withdrew $42 billion from their accounts.
• March 10, 2023: The California Department of Financial Protection and Innovation shut down SVB and appointed the FDIC as receiver.
• March 12, 2023: The FDIC announced that it had granted insured depositors full access to their insured deposits, while issuing receivership certificates on uninsured funds.
• March 13, 2023: The FDIC reopened all 17 SVB branches, resuming banking activities under the administration of the Deposit Insurance National Bank of Santa Clara (DINB).
• March 26-27, 2023: First Citizens Bank purchased SVB’s assets and liabilities. The deal included $110 billion in assets, $56 billion in deposits, and $72 billion in loans.

Impact on Depositors and Investors

The FDIC is an independent agency of the U.S. government. FDIC insurance covers deposits up to $250,000 per depositor per bank for each account type when FDIC-insured banks fail. This protection covers principal deposits, plus accrued interest. Let’s say you deposit $100,000 in an FDIC-insured bank and over time your money accrues $3,000 in interest. If the bank fails, FDIC insurance will cover the entire $103,000 loss.

The majority of SVB deposits exceeded the FDIC coverage limit. Typically, the FDIC would not cover losses over the $250,000 threshold. But in the SVB case, the FDIC did, by applying the systemic risk exception, which applies when losses due to failure could seriously impact the financial stability of the overall market. 

Applying the systemic risk exception requires the approval of two-thirds of FDIC board members, the Treasury Secretary, and the president of the United States. Prior to the SVB failure, the FDIC had applied the systemic risk exception five times after 1991, all during the 2008-2009 financial crisis.

“[More than] 90% of SVB’s $175 billion in deposits exceeded the FDIC’s $250,000 insurance limit, leaving most funds uninsured and at risk in a typical failure,” Vo said. “This posed a severe threat to depositors, particularly tech firms dependent on these accounts.” 

He noted that SVB’s collapse, given its position as the 16th largest bank in the U.S., “threatened systemic stability and risked contagion to other regional banks.”

But the systemic risk exception only applied to depositor funds. The FDIC did not cover losses suffered by investors and shareholders. “SVB’s stock plummeted after the March 8 announcement, dropping 60% on March 9 and halting trading on March 10 as the bank failed,” Vo said. “After its closure, shares became effectively worthless, wiping out equity investors.” 

First Citizens’ acquisition of SVB’s assets and liabilities did not include equity stakes, so shareholders received no recovery.

Who Paid for the Rescue?

U.S. taxpayers did not directly fund Silicon Valley Bank depositor losses. According to the Federal Reserve, the bank’s failure cost the Deposit Insurance Fund around $16.1 billion. The FDIC manages the Deposit Insurance Fund, which is funded through assessments on FDIC-insured banks. Banks pay assessments based on their insured deposits and their total liabilities.

Impact on the Banking Industry 

Banks use depositor money to make loans and invest in securities, typically long-term investments. Federal banking laws require banks to retain a portion of their deposits to cover customer withdrawals. But when a bank run occurs, depositors may seek to withdraw more money than is available.

Prompted by the SVB failure, the Federal Reserve established the $25 billion Bank Term Funding Program, which provides loans to financial institutions when they are unable to meet their depositor withdrawal demands. The loan terms extend for up to one year and require qualified collateral such as U.S. agency mortgage-backed securities or U.S. Treasuries.

While the funding program can serve as a stopgap for future bank failures, Vo noted that the SVB collapse impacted the banking industry in several ways. “Regional bank stocks plummeted,“ he said. Customers fled smaller banks for big players such as JPMorgan and Wells Fargo. “Mid-sized banks faced higher funding costs and deposit rate hikes to retain customers.”

Other Bank Failures

While the FDIC’s actions helped prevent widespread financial contagion, the SVB failure did prompt bank runs that rendered two other banks insolvent. “Social media and digital banking accelerated deposit withdrawals, spreading panic across regional banks fast,” Vo said.

On March 12, 2023, the New York State Department of Financial Services closed Signature Bank after it failed to meet its depositor obligations. Again, the FDIC declared a systemic risk exception to cover uninsured Signature deposits. The SVB and Signature collapses resulted in combined losses of approximately $22.5 billion, $19.2 billion of which was attributed to systemic risk exception payouts.

Depositor panic initiated by the SVB and Signature failures prompted a run on First Republic Bank of San Francisco, too, causing it to collapse in May 2023. Once again, federal regulators found that First Republic had grown rapidly and over-relied on uninsured deposits.

What Happens to Your Money If Your Bank Collapses?

Bank failures—particularly those involving large financial institutions—do not occur often. When they do, the FDIC steps in to protect insured depositors. The FDIC insures deposits up to $250,000. Typically, the FDIC will not cover funds that exceed this threshold except when it declares a systemic risk exception.

So, if a customer deposits $300,000 in an FDIC-insured bank, the Deposit Insurance Fund will only cover $250,000. However, the FDIC will issue depositors a receiver’s certificate, which provides proof of a claim against the bank. After the bank’s assets are liquidated, the claimant may recoup some or all of their remaining uninsured deposits.

The Bottom Line

The collapse of Silicon Valley Bank highlights how quickly a seemingly stable financial institution can fail. In its review of the collapse, the Federal Reserve noted that SVB’s managers did not manage risks and did not act swiftly when vulnerabilities arose. The bank relied on uninsured deposits and invested heavily in long-term securities. The rapid spread of information on social media also played a significant role in the speed and severity of the SVB failure.

The FDIC’s systemic risk exception helped rescue many of SVB’s uninsured depositors while preventing widespread financial contagion. The Federal Reserve determined that the provisions of the Economic Growth, Regulatory Relief, and Consumer Protection Act weakened protections within the banking system. Subsequently, the establishment of the Bank Term Funding Program promised to provide relief for banks facing insolvency, with the goal of preventing future bank failures.

When you refinance your home, you’re replacing your existing mortgage with a new one that, ideally, has a lower interest rate, better terms, or both. While this can lower your mortgage payment, you should only refinance when it makes sense. For example, it might be a good time to refinance if interest rates have dropped or your credit score has improved.

Key Takeaways

• Refinancing can help you secure more favorable rates or get cash from your home equity.
• Comparing offers from several mortgage refinance companies or working with a mortgage broker can help you find the best deal.
• Refinancing is generally worth it if you stay in your home long enough for savings to equal costs.

5 Reasons to Refinance

Refinancing your home can be a smart financial move, making it easier to manage your mortgage or saving you money. Here are some key reasons to consider refinancing:

1. Falling interest rates: When mortgage rates drop, you can take advantage of lower rates to reduce monthly payments and overall loan costs.
2. Replacing an adjustable-rate mortgage (ARM): If you expect ARM rates to rise soon, locking into a fixed-rate mortgage can provide a stable interest rate and predictable  monthly payment.
3. Your credit has improved: A higher credit score can help you qualify for a lower interest rate, better terms, and lower monthly payment compared to your current mortgage.
4. Lengthening the loan term: Extending the loan term can reduce monthly payments, making your mortgage more affordable. However, this may increase the total interest paid over time.
5. Taking cash out of your home: You can access home equity with a cash-out refinance and use those funds for major expenses like home improvements or debt consolidation.

Warning

Refinancing costs can offset potential savings. Always recalculate the breakeven point to make sure it’s a smart decision.

Getting the Best Deal on a Refinance

In order to get the best possible deal when refinancing, start by checking your credit score so you know where you stand. If your credit score has improved since you locked in the rate on your current mortgage, you may qualify for better interest rates.

Shop around with a variety of providers, including banks, credit unions, and mortgage brokers. Also be sure to compare good faith estimates from a variety of lenders, considering the interest rate, closing costs, and fees.

Closing costs can reach up to 5% of the loan’s value. Common fees include:

• Origination fee
• Appraisal fee
• Title search fee
• Title insurance premium

Note

Quotes from online marketplaces are typically only an estimate. Be aware that these platforms may share your personal information with third-parties.

To protect your credit score and mortgage rate prospects, keep your loan shopping within a short time frame. Mortgage inquiries made within a 30–45 day window are treated as a single inquiry.

Is a Mortgage Broker Worth It for a Refinance?

Working with a mortgage broker to refinance your home can be beneficial. Brokers can access multiple lenders on your behalf, in addition to handling paperwork and communication, saving you a significant amount of time. Brokers are typically compensated by loan originators, so you usually don’t have to pay for their services directly.

There are, however, some potential downsides of working with a mortgage broker. For example, a broker may be incentivized to recommend loans from lenders that offer them higher commissions. These loans may not align with your best interests. Additionally, not all lenders work with brokers, so you may miss out on certain options if you don’t also shop around on your own time.

When Should You Lock Your Rate?

Mortgage rates can change often. Once you have an offer you like, lock in your rate 30–60 days before closing to protect against increases.

Only get a mortgage rate lock for as long as you need for closing. Lenders may charge a higher rate or additional fees for a longer lock period.

Are Points Worth the Costs?

You can secure a lower interest rate by paying “points,” or prepaying interest, equal to 1% of your loan value. Buying points can be beneficial if you remain in your home long enough. Points may also be tax-deductible, should you itemize rather than take the standard deduction. 

However, buying points comes with higher upfront costs, which may not be ideal if your funds are limited. It’s generally best to buy points only if you plan to stay in the home at least long enough to break even.

How to Find Your Breakeven Point

The breakeven point of a refinance is the amount of time it takes for your savings to equal your costs. If you sell your home before the breakeven point, you may lose money.

To determine your breakeven point, start by adding up the total fees and closing costs of a refinance. Next, calculate your monthly savings by subtracting the new mortgage payment from your current one, including private mortgage insurance (PMI) savings and potential tax benefits. Divide the total refinancing costs by the monthly savings to get the number of months it will take to breakeven with a refinance.

Note

No-closing-cost loans don’t have a breakeven point since costs are either rolled into the loan or charged as a higher interest rate. Consider comparing the total interest on a no-closing-cost loan to a standard refinance to determine which option would offer you greater savings.

The Bottom Line

Refinancing your home can be an effective way to save money or access home equity, but it’s typically only a good idea when the savings outweigh the costs. If you shop around for the best terms and stay in your home long enough, refinancing can be worth it. However, if closing costs are too high or you can only get a minimal rate reduction, keeping your current mortgage may be the better option.