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A 1099 form is an IRS information return that reports income you received from sources other than a regular employer. If you are a full-time employee, your employer sends you a W-2. But for freelance income, investment income, retirement distributions, rental income, and dozens of other payment types, the payer sends a 1099. You use the information on the 1099 to report that income on your tax return. The IRS also receives a copy directly from the payer — meaning they know about the income whether or not you report it.

The Most Common 1099 Forms

1099-NEC (Non-Employee Compensation)

This is the form freelancers, independent contractors, and gig workers receive. Businesses issue a 1099-NEC to anyone they paid $600 or more during the year for services (other than employees). If you earned $1,500 doing graphic design for a company, they send you a 1099-NEC showing $1,500. This income is subject to both income tax and self-employment tax (15.3% on net earnings up to the Social Security wage base).

Important: you must report this income even if you do not receive a 1099-NEC. The threshold for issuance is $600, but there is no threshold below which the income is non-taxable.

1099-MISC (Miscellaneous Income)

Previously the catch-all for non-employee compensation, 1099-MISC now covers other types of miscellaneous payments: rent paid to a landlord, prizes and awards, royalties ($10 or more), attorney payments, and crop insurance proceeds. If a company paid you $800 in rent or $1,200 in royalties, they send a 1099-MISC.

1099-INT (Interest Income)

Banks and financial institutions send this form if they paid you $10 or more in interest during the year. This includes interest from savings accounts, CDs, money market accounts, and bonds. The amount goes on Schedule B of your tax return and is taxed as ordinary income.

1099-DIV (Dividends)

Brokerage firms send this when your investments paid $10 or more in dividends or capital gain distributions. Box 1a shows ordinary dividends; Box 1b shows qualified dividends, which are taxed at the lower long-term capital gains rate (0%, 15%, or 20% depending on your income). Ordinary dividends are taxed at your regular income rate.

1099-B (Proceeds from Broker and Barter Exchange Transactions)

Your broker sends this for each sale of stocks, bonds, mutual fund shares, or other investments during the year. It shows the proceeds, the cost basis, and whether the gain or loss is short-term or long-term. You use this to complete Schedule D and Form 8949 on your return. The 1099-B can be many pages for active traders.

1099-R (Distributions from Pensions, Annuities, IRAs)

You receive a 1099-R for any distribution from a retirement account, including 401(k)s, IRAs, pensions, and annuities. Box 1 shows the gross distribution; Box 2a shows the taxable amount; Box 7 contains a distribution code that tells the IRS the nature of the distribution (regular distribution, early withdrawal, rollover, etc.). If you completed a rollover, the taxable amount should be $0 and the code should indicate a rollover.

1099-G (Government Payments)

Issued for unemployment compensation (taxable as ordinary income), state tax refunds (taxable if you itemized in the prior year), and certain other government payments.

1099-S (Proceeds from Real Estate Transactions)

Issued when you sell real estate. The proceeds are reported here and must be reconciled with your cost basis to determine gain or loss. Note that gain from selling your primary residence may be excluded (up to $250,000 for single filers, $500,000 for married filing jointly) if you owned and lived in the home for 2 of the 5 years before the sale.

When Do 1099s Arrive?

Most 1099 forms must be sent to you by January 31. Brokerage 1099s (1099-B, 1099-DIV, 1099-INT) often arrive in mid-February and can be corrected as late as March — meaning you may receive an amended 1099 after you’ve already filed. If this happens, you may need to file an amended return (Form 1040-X).

What If You Disagree With the Amount on a 1099?

Contact the issuer directly and request a corrected form (1099-C notation). If they refuse and you believe the amount is wrong, report the income on your return but include a note explaining the discrepancy. Never simply ignore a 1099 — the IRS will match it against your return and flag any unmatched amounts for a notice or audit.

Bottom Line

Collect every 1099 you receive and match them against your records before filing. Report all the income shown — the IRS has the same information. If you are self-employed and receive 1099-NEC forms, also track your business expenses throughout the year, because deductible business expenses reduce the taxable self-employment income reported on the 1099.

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. By investing in a REIT, you gain exposure to real estate returns — rental income and property appreciation — without buying, managing, or financing any property yourself. REITs trade on stock exchanges just like company shares, making them one of the most accessible ways for ordinary investors to add real estate to their portfolios.

How REITs Work

To qualify as a REIT, a company must meet specific IRS requirements:

• At least 75% of total assets must be in real estate, cash, or U.S. Treasuries
• At least 75% of gross income must come from real estate sources (rent, mortgage interest)
• At least 90% of taxable income must be distributed to shareholders as dividends each year
• At least 100 shareholders must own shares
• No more than 50% of shares can be held by five or fewer individuals

The 90% distribution requirement is why REITs typically pay high dividend yields — they are required by law to pass most of their income through to investors. In exchange, REITs pay no corporate income tax, which avoids the double taxation that applies to regular corporations.

Types of REITs

• Equity REITs — Own and operate properties. Rent from tenants is the primary income source. This is the most common type. Subtypes include office, retail, industrial, residential, healthcare, and specialty (data centers, cell towers, self-storage).
• Mortgage REITs (mREITs) — Lend money to real estate owners or purchase existing mortgages and mortgage-backed securities. Income comes from interest, not rent. More sensitive to interest rate changes than equity REITs.
• Hybrid REITs — Hold both properties and mortgages. Relatively uncommon.

Publicly Traded vs. Non-Traded REITs

• Publicly traded REITs are listed on major stock exchanges (NYSE, Nasdaq). You can buy and sell shares at market prices through any brokerage account. Highly liquid. This is what most investors mean when they say “REIT.”
• Non-traded REITs are registered with the SEC but not listed on exchanges. They are sold through brokers, typically with high minimum investments and substantial fees (often 7–15% upfront commissions). Illiquid for years. Generally not recommended for most retail investors due to the fee structure and lack of price transparency.
• Private REITs are not registered with the SEC and are only available to accredited investors.

How to Invest in Publicly Traded REITs

You can invest in REITs through:

• Individual REIT stocks — Buy shares of specific REITs through your brokerage account just like any stock. Examples: Prologis (industrial), American Tower (cell towers), Realty Income (retail), Welltower (senior housing).
• REIT ETFs — Diversified funds that hold dozens of REITs. Vanguard Real Estate ETF (VNQ), Schwab U.S. REIT ETF (SCHH), and iShares U.S. Real Estate ETF (IYR) are the most popular. Expense ratios are low (0.08–0.40%).
• REIT mutual funds — Similar to ETFs but actively managed and purchased at end-of-day NAV. Higher fees than ETF equivalents.

REIT Dividend Taxes

REIT dividends are taxed differently from qualified stock dividends. Most REIT dividends are classified as ordinary income (taxed at your regular income tax rate), not qualified dividends (which receive the lower 15% rate). One exception: under the Tax Cuts and Jobs Act, REIT dividends qualify for the 20% pass-through deduction (Section 199A), which effectively reduces the tax rate on REIT dividends by 20% of the dividend amount for eligible taxpayers.

For this reason, REITs are often better held in tax-advantaged accounts (IRAs, 401(k)s) where the dividend tax treatment is irrelevant — distributions compound tax-deferred or tax-free.

Key Metrics for Evaluating REITs

• Funds From Operations (FFO): The REIT equivalent of earnings per share. Adds depreciation back to net income because real estate depreciation is a non-cash charge that distorts profitability. Look at FFO instead of net income when evaluating REIT value.
• Adjusted FFO (AFFO): FFO minus maintenance capital expenditures — a closer proxy for sustainable dividend capacity.
• Dividend yield: Annual dividend divided by current share price. Higher is not always better — check whether the payout ratio is sustainable.
• Occupancy rate: For equity REITs, the percentage of rentable space occupied. Higher occupancy generally means more stable income.
• Debt-to-equity ratio: REITs typically carry significant debt. Compare to peers in the same sector.

Bottom Line

REITs are one of the most accessible ways to add real estate exposure to a diversified portfolio. For most investors, a broad REIT ETF in a tax-advantaged account is the simplest approach. If you want sector-specific exposure — data centers, industrial logistics, healthcare — individual REIT stocks allow targeted bets. Avoid non-traded REITs due to their fee structure and illiquidity unless you have a specific reason and understand the risks.

A 457(b) plan is a tax-deferred retirement savings account offered by state and local government employers (such as cities, counties, school districts, and public universities) and certain tax-exempt nonprofit organizations. Like a 401(k), contributions reduce your taxable income and grow tax-deferred until withdrawal. But the 457(b) has several features that make it distinctly more flexible than its private-sector counterpart — most importantly, there is no 10% early withdrawal penalty.

Who Has Access to a 457(b)

Access depends on your employer:

• Governmental 457(b): Offered by state and local government employers. Open to all employees (not just highly compensated employees). These are the most common type and are the focus of this article.
• Non-governmental 457(b): Available at certain nonprofits (501(c) organizations). Access is typically limited to highly compensated employees. These plans are funded differently and carry more risk — your money is considered an asset of the employer, not held in trust. Less common and more complicated.

Contribution Limits

In 2026, the standard 457(b) contribution limit is $23,500, the same as a 401(k) and 403(b). There are two additional catch-up contribution opportunities:

• Age 50+ catch-up: An extra $7,500, for a total of $31,000.
• Three-year pre-retirement catch-up: In the three calendar years before the year you reach your plan’s normal retirement age, you can contribute up to twice the standard limit ($47,000 in 2026). This catch-up is separate from and may not be used simultaneously with the age-50 catch-up — you use whichever is larger.

Critically: if you also have access to a 403(b) (common for teachers and university employees), you can contribute the full $23,500 to both plans independently — $47,000 total pre-tax contributions. The 457(b) limit is completely separate from 401(k)/403(b) limits.

The Key Advantage: No Early Withdrawal Penalty

Unlike a 401(k) or IRA, governmental 457(b) plans do not charge the 10% early withdrawal penalty when you take money out before age 59½. If you separate from service for any reason — retirement, resignation, termination — you can withdraw funds immediately without the penalty. You still owe income tax on withdrawals, but not the extra 10%.

This makes the 457(b) particularly valuable for people who plan to retire early (before 59½), such as public safety workers (police, firefighters) with 20–25 year pension eligibility. They can access 457(b) funds immediately upon retirement without waiting for 59½.

457(b) vs. 401(k): Key Differences

Feature	457(b) (Governmental)	401(k)
Contribution limit (2026)	$23,500	$23,500
Early withdrawal penalty	None after separation	10% before age 59½
Stacks with 403(b)?	Yes — separate limits	No — shares limit with 403(b)
Three-year catch-up	Yes	No
Employer match	Sometimes	Common
Required minimum distributions	Age 73 (same as 401(k))	Age 73

Roth 457(b)

Many governmental 457(b) plans now offer a Roth option, allowing after-tax contributions that grow tax-free. If your plan offers both traditional and Roth 457(b) options, the same income and contribution rules as a Roth 401(k) apply: no deduction upfront, but qualified withdrawals in retirement are tax-free. There is no income limit on Roth 457(b) contributions, unlike direct Roth IRA contributions.

What Happens When You Leave Your Job

When you leave government employment, you can:

• Take a cash distribution (taxable, but no 10% penalty)
• Leave the money in the plan if the plan allows it
• Roll the balance into an IRA, 401(k), or another 457(b) — governmental 457(b) assets can be rolled into IRAs or 401(k)s, giving you more investment options in retirement

Non-governmental 457(b) assets generally cannot be rolled into an IRA — they must be distributed according to the plan’s terms. This is another reason governmental and non-governmental plans differ significantly.

Bottom Line

If you work in government or education and have access to a 457(b), it should be near the top of your savings priority list — especially if you also have a 403(b), since you can max out both simultaneously. The no-penalty early withdrawal feature is a standout benefit for anyone who plans to retire before age 59½. Contribute at least enough to capture any employer match, then consider maxing out the 457(b) before the 403(b) if you are uncertain about your retirement timeline.

Required Minimum Distributions (RMDs) are the minimum amounts the IRS requires you to withdraw from most tax-deferred retirement accounts each year once you reach a certain age. The logic: the government gave you tax breaks on the money going in, so it wants to collect taxes when you take money out. You cannot leave the money in tax-deferred accounts indefinitely. For most people in 2026, the RMD starting age is 73 (raised from 72 by the SECURE 2.0 Act). Failure to take the full RMD triggers a 25% excise tax on the amount you should have withdrawn but didn’t.

Which Accounts Require RMDs

RMDs apply to:

• Traditional IRAs
• 401(k), 403(b), and 457(b) plans
• SEP IRAs and SIMPLE IRAs
• Inherited IRAs (different rules apply — see below)

RMDs do not apply to:

• Roth IRAs during the owner’s lifetime (no RMDs required)
• Roth 401(k)s during the owner’s lifetime (as of 2024, SECURE 2.0 eliminated Roth 401(k) RMDs)

When RMDs Start

For most people, RMDs begin at age 73. Your first RMD is due by April 1 of the year following the year you turn 73 (your “required beginning date”). After that, all subsequent RMDs are due by December 31 each year.

Important: if you delay your first RMD to April 1, you will take two RMDs in that calendar year — the delayed first one and the second one by December 31. This double withdrawal can push you into a higher tax bracket. Consider whether it makes sense to take your first RMD in the year you turn 73 to avoid this.

Exception for current employees: if you are still working and do not own more than 5% of the company, you can delay RMDs from your current employer’s 401(k) until you retire. This does not apply to IRAs or accounts from prior employers.

How to Calculate Your RMD

Your RMD for the year equals your account balance on December 31 of the prior year divided by a life expectancy factor from the IRS Uniform Lifetime Table (Publication 590-B).

Example: Account balance on December 31, 2025: $500,000. You are 74 years old in 2026. The IRS Uniform Lifetime Table factor for age 74 is 25.5. RMD = $500,000 ÷ 25.5 = $19,608.

You must calculate RMDs separately for each IRA you own. However, you can then add them together and take the total from any one or combination of your IRAs. For 401(k)s, RMDs must be calculated and taken from each account separately — you cannot aggregate them.

What to Do With Your RMD

You can do anything with RMD funds. Spend them, invest them in a taxable brokerage account, gift them, or donate them. RMDs are included in ordinary taxable income and will raise your AGI for the year. This can affect:

• Medicare Part B and D premiums (IRMAA surcharges apply at higher income levels)
• Taxation of Social Security benefits (up to 85% of benefits become taxable above certain income thresholds)
• Eligibility for certain deductions and credits that phase out at higher incomes

Qualified Charitable Distributions (QCDs): A Tax-Smart Alternative

If you are 70½ or older and charitably inclined, you can make a Qualified Charitable Distribution — directing up to $105,000 (in 2026) per year from your IRA directly to a qualified charity. This counts toward your RMD but is excluded from your taxable income. You receive no charitable deduction, but the income exclusion is often more valuable, especially for people who take the standard deduction. A QCD can lower your AGI and reduce the taxes on Social Security benefits and Medicare surcharges.

Inherited IRA RMDs

If you inherit an IRA, the rules changed significantly under the SECURE Act (2019) and SECURE 2.0. Most non-spouse beneficiaries must now empty the inherited IRA within 10 years of the original owner’s death. Spouses have more options, including treating the IRA as their own. The rules differ depending on whether the original owner had already started taking RMDs. Consult a tax advisor about inherited IRA rules, as they are complex and the IRS issued late-breaking guidance in 2024 clarifying annual distribution requirements.

Penalty for Missing an RMD

Before SECURE 2.0, the penalty was 50% of the missed amount. SECURE 2.0 (effective 2023) reduced it to 25%, further reduced to 10% if corrected within two years. This is still steep — if you missed a $20,000 RMD, the penalty is $5,000 (25%). Take your RMDs on time.

Bottom Line

RMDs are mandatory for most tax-deferred retirement accounts starting at age 73. Calculate them annually using your prior year-end balance and your IRS life expectancy factor. If you don’t need the income, consider a Qualified Charitable Distribution to satisfy the RMD tax-free if you give to charity. Plan ahead — RMDs can meaningfully increase your taxable income and affect Medicare premiums.

Related: Inherited IRA Rules: The 10-Year Distribution Rule Explained (2026)

Related: SECURE Act 2.0: Complete Guide to Retirement Account Changes in 2026

The Saver’s Credit (officially the Retirement Savings Contributions Credit) is a federal tax credit that rewards low- and moderate-income workers for contributing to a retirement account. Unlike a deduction, which reduces taxable income, the Saver’s Credit reduces your actual tax bill dollar for dollar — and it stacks on top of the existing tax benefits of contributing to a 401(k) or IRA. In 2026, the credit is worth 10%, 20%, or 50% of up to $2,000 in contributions ($4,000 if married filing jointly), for a maximum credit of $1,000 per person.

Who Qualifies

To claim the Saver’s Credit, you must:

• Be 18 or older
• Not be a full-time student
• Not be claimed as a dependent on another person’s tax return
• Have adjusted gross income (AGI) below the threshold for your filing status

2026 Income Limits and Credit Rates

AGI (Single / MFS)	AGI (Head of HH)	AGI (Married / Jointly)	Credit Rate
$0 – $23,000	$0 – $34,500	$0 – $46,000	50%
$23,001 – $25,000	$34,501 – $37,500	$46,001 – $50,000	20%
$25,001 – $38,250	$37,501 – $57,375	$50,001 – $76,500	10%
Over $38,250	Over $57,375	Over $76,500	0% (not eligible)

Thresholds are adjusted annually. Verify the current limits at irs.gov before filing.

What Contributions Qualify

Contributions to any of the following accounts count toward the Saver’s Credit:

• Traditional or Roth IRA
• 401(k), 403(b), or governmental 457(b)
• SIMPLE IRA or SEP IRA (employee contributions only)
• ABLE account (for disabled individuals)

The eligible contribution amount is reduced by any distributions you took from retirement accounts in the past two years (the current year plus the two preceding years). So if you withdrew money from your IRA recently, it may reduce the credit even if you are also contributing.

How Much Is the Credit Worth?

Example: A single filer with $22,000 AGI contributes $2,000 to a Roth IRA. Their credit rate is 50%, so the Saver’s Credit is $1,000 (50% × $2,000). This $1,000 directly reduces their tax bill. If their tax bill was $800, the credit brings it to $0 — but it is not refundable, so they receive no cash refund from the Saver’s Credit itself (though other refundable credits like the EITC may still generate a refund).

Important: the Saver’s Credit is non-refundable. It can reduce your tax bill to zero but cannot generate a refund on its own. If your tax liability is already zero before the credit, you do not benefit.

How to Claim It

File IRS Form 8880 with your tax return. The form calculates your credit based on your contributions and AGI. Most tax software completes this automatically when you enter your retirement contributions. You must also file Form 1040 (not 1040-EZ, which was discontinued).

Why This Credit Gets Missed

The Saver’s Credit is one of the most overlooked credits in the tax code. Many eligible filers don’t know it exists. Others assume they earn too much, not realizing the income thresholds are more generous than they expect for moderate earners. Part-time workers, recent graduates in their first jobs, and anyone who took a pay cut during the year should specifically check eligibility.

SECURE 2.0 Change: Matching Contributions Starting 2027

Under SECURE 2.0, starting in 2027 the Saver’s Credit will be replaced by the Saver’s Match — a government contribution of up to $1,000 deposited directly into your retirement account (a refundable benefit). For 2026, the current non-refundable credit structure described above still applies.

Bottom Line

If your income qualifies, the Saver’s Credit is essentially free money for doing something you should be doing anyway — saving for retirement. Maximize its value by contributing at least $2,000 to a qualifying account and making sure your tax software identifies and applies the credit. If you have a tax liability and are in the 50% credit tier, this is a direct $1,000 reduction in what you owe.

The Earned Income Tax Credit (EITC) is a federal tax credit designed to benefit working people with low to moderate income. It is refundable — meaning if the credit is larger than the taxes you owe, you receive the difference as a refund. In 2026, the maximum EITC ranges from $649 (no qualifying children) to $7,830 (three or more qualifying children). Roughly 23 million taxpayers claim it each year, yet the IRS estimates that about 20% of eligible people don’t claim it, often because they don’t know they qualify.

Who Qualifies for the EITC

To claim the EITC, you must meet all of the following:

• Have earned income. You must have worked and earned wages, salaries, tips, or self-employment income during the year. Investment income alone does not qualify.
• Meet the income limits. Your adjusted gross income (AGI) and earned income must be below thresholds that vary by filing status and number of qualifying children (see table below).
• Have a valid Social Security number. You, your spouse (if filing jointly), and any qualifying children must each have a Social Security number that is valid for employment.
• Not file as “married filing separately.” This filing status disqualifies you.
• Be a U.S. citizen or resident alien all year.
• Not have investment income over $11,600. If your investment income (interest, dividends, capital gains) exceeds this limit in 2026, you do not qualify.
• Not be claimed as a dependent on someone else’s return.

2026 EITC Income Limits and Maximum Credits

Filing Status	No Children	1 Child	2 Children	3+ Children
Single / Head of Household	Up to $18,591	Up to $49,084	Up to $55,768	Up to $59,899
Married Filing Jointly	Up to $25,511	Up to $56,004	Up to $62,688	Up to $66,819
Maximum Credit	$649	$4,328	$7,152	$7,830

Income limits and credit amounts are indexed annually for inflation. Check IRS.gov for the most current figures at filing time.

What Counts as a Qualifying Child

A qualifying child for EITC purposes must meet four tests:

1. Relationship: Must be your son, daughter, stepchild, foster child, sibling, half-sibling, or a descendant of any of these.
2. Age: Must be under age 19 at the end of the year, under 24 if a full-time student, or any age if permanently and totally disabled.
3. Residency: Must have lived with you in the U.S. for more than half the year.
4. Joint return: Must not have filed a joint return with a spouse (unless only to claim a refund).

EITC Without Children

You can claim the EITC even with no qualifying children if you are between ages 25 and 64 at the end of the tax year, you are not a dependent, and you meet the income and other eligibility rules. The credit amount is smaller ($649 maximum in 2026) but still meaningful.

How to Claim the EITC

File your federal tax return (Form 1040) and complete Schedule EIC if you have qualifying children. The IRS will calculate the credit amount based on your income and filing status. If you use free tax software (IRS Free File, FreeTaxUSA, TurboTax Free Edition), the EITC is calculated automatically once you enter your income and family information.

If you are eligible for the EITC and did not claim it in a prior year, you can file an amended return (Form 1040-X) up to three years after the original due date to claim the credit for that year.

Common Reasons People Miss the EITC

• They don’t have children and don’t realize they can still qualify
• Their income varied significantly and they were below the limit only in some years
• They had self-employment income and weren’t aware it counts as earned income
• They received a notice of EITC disallowance in a prior year and assumed they could never claim it again (you can re-qualify each year)

EITC Refund Timing

By law, the IRS cannot issue refunds to EITC claimants before mid-February, even if you file on January 1. This is a fraud-prevention measure. Most EITC refunds arrive by late February or early March if you file electronically with direct deposit.

Bottom Line

The EITC is one of the most valuable tax credits available to working families with moderate income. If your income is below the threshold for your family size, file your tax return even if you think you don’t owe taxes — the refundable credit may generate a cash refund. Use the IRS EITC Assistant tool at irs.gov to check your eligibility before filing.

A backdoor Roth IRA is a two-step strategy that lets high earners contribute to a Roth IRA even when their income exceeds the direct contribution limit. There is nothing illegal or even unusual about it — the IRS has acknowledged it as a legitimate strategy. In 2026, the ability to contribute directly to a Roth IRA phases out between $150,000–$165,000 for single filers and $236,000–$246,000 for married filing jointly. If you earn above those thresholds, the backdoor is your path in.

The Two-Step Process

The backdoor Roth works because there is no income limit on converting a traditional IRA to a Roth IRA, even though there is an income limit on contributing directly to a Roth IRA.

1. Make a non-deductible contribution to a traditional IRA. In 2026, the limit is $7,000 ($8,000 if you are 50 or older). Anyone with earned income can do this regardless of income level. Because you already paid tax on this money and the contribution is non-deductible, it has a “basis” of $7,000 — meaning it is after-tax money.
2. Convert the traditional IRA to a Roth IRA. Shortly after making the contribution (typically within a few days to a week), request a Roth conversion for the full balance. The conversion moves the money from the traditional IRA to the Roth IRA. Because the original contribution was non-deductible, the conversion triggers little to no tax — you’ve already paid tax on the principal, and if there is no growth between contribution and conversion, the taxable amount is $0.

The Pro-Rata Rule: The Most Important Caveat

The backdoor Roth strategy works cleanly only if you have no other pre-tax traditional IRA funds. If you do, the IRS applies the pro-rata rule, which treats all your IRA money as a single pool when calculating how much of a conversion is taxable.

Example: You have $63,000 in a pre-tax IRA from a previous 401(k) rollover, plus the new $7,000 non-deductible contribution — a total of $70,000. When you convert $7,000, the IRS treats 10% of it ($700) as after-tax and 90% ($6,300) as pre-tax. You owe income taxes on that $6,300. The backdoor becomes much less attractive or outright unfavorable in this situation.

Solutions to the pro-rata problem:

• Roll your pre-tax IRA funds into your current employer’s 401(k) before doing the backdoor Roth. 401(k) balances are not included in the pro-rata calculation for IRA conversions.
• If your employer’s plan accepts rollovers, this clears the path for a clean backdoor conversion.

Reporting the Backdoor Roth on Your Tax Return

The backdoor Roth requires Form 8606 to be filed with your tax return every year you make a non-deductible IRA contribution. Form 8606 tracks your IRA basis (the after-tax money you’ve contributed) so the IRS knows which portion of any future conversions or withdrawals is taxable. If you skip this form, you risk being taxed twice on the same money when you withdraw.

Your IRA custodian will also send you Form 1099-R showing the conversion. The taxable amount should be $0 (or close to it) if you completed the conversion promptly with no earnings on the non-deductible contribution.

Mega Backdoor Roth: A More Powerful Variation

If your 401(k) plan allows after-tax contributions and in-service withdrawals or conversions, you can execute a mega backdoor Roth. This lets you contribute an additional $46,500 (the gap between the $70,000 total 401(k) contribution limit and the $23,500 employee limit in 2026) as after-tax 401(k) contributions, then convert them to a Roth IRA or Roth 401(k). Not all employers allow this — you need to check your plan documents.

Is the Backdoor Roth Worth It?

Yes, for most high earners with no pre-existing traditional IRA balances. Roth IRA money grows tax-free, withdrawals in retirement are tax-free, and Roth IRAs have no required minimum distributions during the owner’s lifetime. The $7,000 annual contribution is modest, but compounding over 20–30 years in a tax-free account is meaningful.

If you have a large pre-tax IRA balance and cannot roll it into a 401(k), the pro-rata rule may make the backdoor impractical. Talk to a tax professional about your specific situation before proceeding.

Bottom Line

The backdoor Roth IRA is a straightforward two-step process: make a non-deductible traditional IRA contribution, then convert it to Roth. The main complication is the pro-rata rule, which can create an unexpected tax bill if you have pre-tax IRA balances. File Form 8606 every year. Do it early in the year while the contribution has no time to generate earnings that would trigger tax on conversion.

Related Reading

• how to do a Roth IRA conversion

Switching banks is worth doing if your current bank charges fees you don’t need to pay, pays near-zero interest on savings, or has poor customer service. The main reason people stay with a bad bank is fear of disrupting automatic payments and direct deposits. Done in the right order, switching takes about two weeks and carries virtually no risk of missed payments.

Step 1: Choose Your New Bank and Open the Account

Before closing anything, open your new account and let it sit funded for two to four weeks. Compare banks on:

• Monthly fees: Many online banks charge $0. Traditional banks often charge $10–$15/month unless you maintain a minimum balance.
• Interest rate on checking/savings: Online banks like Ally, Marcus, SoFi, and Discover typically pay 4–5% APY on high-yield savings. Traditional brick-and-mortar banks often pay 0.01–0.10%.
• ATM network: Make sure your new bank reimburses out-of-network ATM fees or has a large free network.
• Mobile app quality: Check app store reviews. If you primarily bank on your phone, this matters more than branch access.
• FDIC insurance: Confirm the new bank is FDIC-insured (or NCUA-insured if a credit union). Coverage is up to $250,000 per depositor, per institution.

Step 2: List Every Automatic Payment and Direct Deposit Linked to Your Old Account

This is the most important step. Go through your last 2–3 months of bank statements and identify every recurring transaction:

• Direct deposit (payroll, government benefits, freelance payments)
• Automatic bill payments (utilities, rent, mortgage, insurance, subscriptions)
• Auto-transfer to savings or investment accounts
• Loan payments (auto, student, personal)
• Tax payments

Make a spreadsheet with the company name, amount, and the date it typically hits. This becomes your switching checklist.

Step 3: Update Direct Deposit First

Contact your employer’s payroll department and provide your new bank account and routing numbers. Many employers process payroll changes on a 1–2 pay cycle lag, so initiate this early. Federal government benefit direct deposits (Social Security, VA benefits) can be updated at ssa.gov or by calling the relevant agency.

Keep your old account open and funded during the transition — if a deposit hits the old account, you can transfer it manually.

Step 4: Update Automatic Payments One at a Time

Work through your list systematically. For each biller, log into your account and update the payment method to your new bank. Do this at least 5–7 days before the payment is due to ensure processing time. Some companies require a voided check or take several days to verify new banking information.

Priority order: mortgage or rent first (missing these has the most severe consequences), then utilities, then subscriptions.

Step 5: Let Your Old Account Run in Parallel for 60–90 Days, Then Close It

After updating all payments and direct deposits, keep your old account open with a small balance ($100–$200) for 60–90 days. This catches any payment that you missed in your list — an annual subscription renewal, a quarterly insurance premium, or a dormant automatic payment you forgot about.

After 60–90 days with no unexpected activity, transfer the remaining balance to your new account and close the old one.

How to Close Your Old Account

Visit a branch, call customer service, or request closure online depending on your bank’s process. Get confirmation in writing (email or letter) that the account is closed and a $0 balance is confirmed. Ask to have any pending interest credited before closure. Do not simply withdraw all funds and stop using the account — inactive accounts with zero balances can generate inactivity fees that go to collections.

Switching Mortgage Autopay

If your mortgage payment is automatically deducted from your checking account, contact your mortgage servicer well in advance — 2–3 weeks before the next payment is due. They often require a paper or electronic authorization form and a voided check. Confirm the change was received and active before relying on it.

Bottom Line

The two-week overlap period — running old and new accounts simultaneously while updating payments systematically — is what makes switching nearly risk-free. Don’t rush it. The cost of a missed mortgage payment or a bounced automatic bill payment is far higher than a few weeks of maintaining two accounts.

Getting approved for a credit card when you have no credit history is a genuine catch-22: lenders want to see credit history before they extend credit. But there are several card types specifically designed for people starting from zero, and a few strategies that accelerate your path to getting approved for standard cards.

Your Best Starting Options

1. Secured Credit Card

A secured card requires a cash deposit that becomes your credit limit — typically $200–$500. The deposit protects the lender if you don’t pay, which is why approval is nearly guaranteed regardless of credit history. Use the card for small purchases, pay the full balance each month, and the issuer reports your payment history to the credit bureaus. After 12–18 months of responsible use, most issuers will upgrade you to an unsecured card and return your deposit.

Best secured cards for credit building: Discover it Secured (earns cash back, reviews for upgrade), Capital One Platinum Secured (low deposit requirement), and Chime Credit Builder (no minimum deposit, no interest if you pay balance from connected account).

2. Student Credit Card

If you are currently enrolled in college or university, student credit cards are designed for people with limited or no credit history. They typically have low credit limits and few frills but are easier to get approved for than standard cards. Discover it Student Cash Back, Capital One SavorOne Student, and Bank of America Cash Rewards for Students are common options. Having income — even part-time — strengthens your application.

3. Become an Authorized User on Someone Else’s Account

If a parent, spouse, or trusted family member has a credit card in good standing, ask them to add you as an authorized user. The account’s full history — including account age, credit limit, and payment record — appears on your credit report. You may or may not need to use the card yourself. This can give you a significant credit history boost immediately and qualify you for approval on your own card faster.

4. Credit-Builder Loan

A credit-builder loan works backwards from a regular loan: you make monthly payments, and at the end of the term (usually 6–24 months), you receive the lump sum. Community banks, credit unions, and online lenders like Self and Credit Strong offer these. The loan payment history is reported to the bureaus, building credit without requiring any existing credit. Once you’ve made 6–12 months of payments, apply for a secured card to diversify your credit mix.

What Lenders Look for When You Have No History

Without a credit history, issuers look at other factors:

• Income: Higher income improves approval odds. You must be able to demonstrate income — a job, financial aid, or allowance from a parent (if under 21).
• Banking relationship: Some banks pre-approve customers who have an existing checking or savings account with them. Capital One, Discover, and Bank of America sometimes extend first card offers to their banking customers.
• No negative marks: Even without a credit score, a ChexSystems report showing unpaid banking fees or overdrafts can hurt your application.

Common Mistakes When Building Credit From Zero

• Applying for multiple cards at once. Each application generates a hard inquiry. Multiple applications in a short period can hurt your score before it gets started. Apply for one card at a time.
• Carrying a balance. “Building credit” does not mean carrying debt. Pay your full balance every month to avoid interest charges. Payment history (whether you pay on time) and credit utilization (how much of your limit you use) drive most of your score.
• Closing the account too soon. Keep your first card open as long as possible. Account age is a factor in your score, and a longer history helps.
• Missing payments. A single missed payment stays on your credit report for seven years. Set up autopay for at least the minimum payment as a backup.

How Long Until You Have a Real Credit Score?

FICO requires at least one account that has been open for 6 months and reported to the bureaus in the last 6 months to generate a score. VantageScore can generate a score with as little as one month of history. Most people see their first credit score within 3–6 months of opening their first account.

With consistent on-time payments and low utilization, you can have a score in the 680–720 range within 12–18 months — sufficient to qualify for standard unsecured credit cards with better rewards.

Bottom Line

The fastest path from no credit to a real credit score is opening a secured card or becoming an authorized user, making on-time payments every month, and keeping your balance low relative to your limit. Avoid applying for multiple products at once, and give it 12–18 months before applying for premium rewards cards.

A defined benefit pension is a retirement plan that guarantees a specific monthly payment in retirement, based on a formula using your salary history and years of service — not on how financial markets perform. The employer takes on all investment risk. As long as the plan is properly funded, you receive your promised benefit for life, regardless of what the stock market does.

How the Benefit Formula Works

Most defined benefit plans use a formula like this:

Annual benefit = Years of service × Final average salary × Benefit multiplier

For example: 30 years of service × $80,000 final average salary × 2% multiplier = $48,000 per year ($4,000/month).

The “final average salary” is typically your average salary over the last 3–5 years of employment, which protects against manipulation. The benefit multiplier ranges from 1% to 2.5% depending on the plan.

Some plans use a career average formula instead: averaging salary over all years of service rather than just the final years. Career average formulas generally produce lower benefits for workers whose salaries grow significantly over their careers.

Who Still Has Defined Benefit Pensions

Traditional pensions have largely been replaced by 401(k)s in the private sector. Today, pensions are most common in:

• Government employment — federal, state, and local government workers (teachers, police, firefighters, military) still predominantly receive defined benefit pensions
• Union employment — trades and labor unions often negotiate pension benefits as part of collective bargaining agreements
• Large legacy corporations — some large private employers still maintain pensions for long-tenured workers, though most have frozen plans for current employees

Approximately 15% of private-sector workers have access to a defined benefit plan, compared to about 80% in 1980.

Vesting

To receive a pension, you must be “vested” — meaning you’ve worked for the employer long enough to have a non-forfeitable right to the benefit. Federal law requires private-sector pensions to vest by 5 years (cliff vesting) or gradually between 3 and 7 years (graded vesting). Government plans vary; many require 5–10 years to vest.

If you leave before vesting, you receive no pension benefit, only a return of any employee contributions you made.

Defined Benefit Pension vs. 401(k): Key Differences

Feature	Defined Benefit Pension	401(k)
Benefit type	Guaranteed monthly income	Account balance (market-dependent)
Investment risk	Employer bears the risk	Employee bears the risk
Portability	Low (tied to employer)	High (can roll over when leaving)
Longevity protection	Yes — pays for life	No — account can run out
Inflation protection	Varies (COLAs sometimes included)	Depends on investment growth
Employee control	Minimal	High

Payment Options at Retirement

When you retire with a pension, you typically choose from several payment options:

• Single life annuity: Highest monthly payment, but stops at your death. No benefit to a surviving spouse.
• Joint and survivor annuity: Lower monthly payment, but continues (typically at 50–100% of the original amount) to your spouse after your death. Often the default option for married workers.
• Lump sum (if offered): A one-time payment of the present value of all future benefits. Gives control and portability but eliminates longevity protection. Consider carefully — the guaranteed monthly income is often worth more than the lump sum when you account for your life expectancy.

What Protects Your Pension If the Company Fails

The Pension Benefit Guaranty Corporation (PBGC) insures most private-sector defined benefit pension plans. If your employer’s plan fails, the PBGC guarantees benefits up to a maximum amount (about $7,400/month for a 65-year-old in 2026). Government pensions are backed by the state or federal government and generally not PBGC-insured, but they have different legal protections.

Bottom Line

A defined benefit pension provides something a 401(k) cannot: guaranteed income you cannot outlive, with no investment risk on your end. If you work in government, education, or a union trade, understand your plan’s vesting schedule and benefit formula — and factor your pension into your overall retirement income plan before making decisions about 401(k) contributions or early retirement.

See Also

• How to Negotiate Your Salary: A Step-by-Step Guide