Inherited IRA: Distribution Rules for Beneficiaries

Inherited IRA Distribution Rules Explained

The distribution rules for inheriting an IRA are complicated, and the SECURE Act of 2019 introduced some significant changes. Consequently, the inherited IRA rules are different for certain beneficiaries if the account holder died in 2020 or later, compared to the rules before that time.

An inherited IRA is governed by IRS rules about how and when the money can be distributed, and whether the beneficiary is an eligible designated beneficiary or a designated beneficiary.

Other factors that influence inherited IRA distributions include the age of the original account holder when they died and whether the account holder had started taking required minimum distributions (RMDs) before their death. The SECURE 2.0 Act added some new changes to this factor.

Read on to learn about inherited IRA distribution rules, the recent changes, and how they might affect you.

Key Points

•   The SECURE Act and SECURE 2.0 made some significant changes to inherited IRAs.

•   Spouse beneficiaries have the option to take a lump-sum, roll over the IRA into their own account, open an inherited IRA, or disclaim the IRA.

•   Many non-spouse beneficiaries must withdraw all funds from an inherited IRA within 10 years.

•   Exceptions to the 10-year rule apply to spouses, minor children, disabled individuals, and those within 10 years of the original account holder’s age, who are all considered eligible designated beneficiaries.

•   Strategies to manage RMDs and minimize taxes include spreading out withdrawals rather than taking a lump sum, following the latest inherited IRA rules, and possibly consulting a tax professional.

What Is an Inherited IRA?

When an IRA owner passes away, the funds in their account are bequeathed to their beneficiary (or beneficiaries), who then have several options to choose from when considering what to do with the funds. The original account could be any type of IRA, such as a Roth IRA, traditional IRA, SEP IRA, or SIMPLE IRA.

If you inherit an IRA, the following conditions determine what you can do with the funds:

•   Your relationship to the deceased account holder (e.g., are you a spouse or non-spouse)

•   The original account holder’s age when they died

•   Whether they had started taking their required minimum distributions (RMDs) before they died

•   The type of IRA involved

Basic Rules About Withdrawals

There are a number of options available for taking inherited IRA distributions, depending on your relationship to the deceased. At minimum, most beneficiaries can either take the inherited funds as a lump sum, or they can follow the 10-year rule, which is one of the changes to the inherited IRA distribution rules that went into effect with the SECURE Act of 2019. (The previous rules allowed beneficiaries of inherited IRAs to stretch out withdrawals over their lifetime. Those rules are still in place if the original IRA account owner died before January 1, 2020.)

The 10-year rule regarding inherited IRAs means that the account must be emptied by the 10th year following the year of death of the original account holder.

The tax rules governing the type of IRA — Roth vs. traditional IRA — apply to the inherited IRA as well. So withdrawals from an inherited traditional IRA are taxed as income. Withdrawals from an inherited Roth IRA are generally tax-free (see more details about this below).

Exceptions for Eligible Designated Beneficiaries

Withdrawal rules for inherited IRAs are different for beneficiaries called “eligible designated beneficiaries” that they are for designated beneficiaries.

According to the IRS, an eligible designated beneficiary refers to:

•   The spouse of the original account holder.

•   A minor child under age 18.

•   An individual who meets the IRS criteria for being disabled or chronically ill.

•   A person who is no more than 10 years younger than the IRA owner.

If you qualify as an eligible designated beneficiary, and you are a non-spouse, here are the options that pertain to your situation:

•   If you’re a minor child, you can extend withdrawals from the IRA until you turn 18.

•   If you’re disabled or chronically ill, or not more than 10 years younger than the deceased, you can extend withdrawals throughout your lifetime.

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What Are the RMD Rules for Inherited IRAs?

Assuming the original account holder had not started taking RMDs, and you are the surviving spouse and sole beneficiary of the IRA, you have a few options:

•   If you roll over the funds to your own IRA. With this option, you have to do an apples-to-apples rollover IRA (tax deferred IRA to tax deferred IRA, Roth to Roth.) Once rolled over, inherited funds become subject to regular IRA rules, based on your age. That means you have to wait to take distributions until you’re 59 ½ or potentially face a 10% penalty in the case of a tax-deferred account rollover.

   RMDs from your own IRA are subject to your life expectancy (you can use the IRS Life Expectancy Table to determine what yours is) and generally begin once you reach age 73.

•   If you move the funds to an inherited IRA. You can also set up an inherited IRA in order to receive the funds you’ve inherited. Again the accounts must match — so funds from a regular Roth IRA must be moved to an inherited Roth IRA.

   Inherited IRAs follow slightly different rules. For example, you must take RMDs every year, but these can be based on your own life expectancy. Distributions from a tax-deferred account are taxable, but the 10% penalty for early withdrawals before age 59 ½ doesn’t apply.

   If the original account holder had started taking RMDs, the spouse has to take RMDs in the year in which they died. After that, the spouse switches to taking their own RMDs from there on out every year.

   Some people prefer to open their inherited IRA account with the same firm that initially held the money for the deceased. However, you can open an IRA with almost any bank or brokerage.

RMD Rules for Non-Spouses

If you are a non-spouse beneficiary, first determine whether you meet the criteria for an eligible designated beneficiary or a designated beneficiary.

•   Eligible designated beneficiaries: As mentioned above, eligible designated beneficiaries include: chronically ill or disabled non-spouse beneficiaries; non-spouse beneficiaries not more than 10 years younger than the original deceased account holder; or a minor child of the account owner.

   Most eligible designated beneficiaries can stretch withdrawals from the inherited IRA over their lifetime. However, once a minor child beneficiary reaches 18, they have 10 years to empty the account.

•   Designated beneficiaries: These individuals must follow the 10-year rule and deplete the account by the 10th year following the year of death of the account holder. After that 10-year period, the IRS will impose a 25% penalty tax on any funds remaining.

   In addition, because of changes introduced by SECURE 2.0 Act, if the original account holder had begun RMDs, beneficiaries must continue to take RMDs yearly, based on their own life expectancy, while emptying the account within 10 years. However, if the account holder had not started taking RMDs, beneficiaries don’t need to make annual withdrawals, but they still must take all of the money out of the account within 10 years.

Multiple Beneficiaries

If there is more than one beneficiary of an inherited IRA, the IRA can be split into different accounts so that there is one for each person.

Then, generally speaking, you must each start taking RMDs based on the type of beneficiary you are, as outlined above, and all assets must be withdrawn from each account within 10 years (aside from the exceptions noted above).

Recommended: Retirement Planning Guide

Inherited IRA Examples

These are some of the different instances of inherited IRAs and how they can be handled.

Spouse inherits and becomes the owner of the IRA: When the surviving spouse is the sole beneficiary of the IRA, they can opt to become the owner of it by rolling over the funds into their own IRA. The rollover must be done within 60 days.

This could be a good option if the original account holder had already started taking RMDs, because it delays the RMDs until the surviving spouse turns 73.

Non-spouse designated beneficiaries: An adult child or friend of the original IRA owner can open an inherited IRA account and transfer the inherited funds into it.

If the original account holder had begun RMDs, the beneficiary must take RMDs yearly, based on their own life expectancy, while emptying the account within 10 years. However, if the account holder had not started taking RMDs, the beneficiary does not need to make annual withdrawals, but they still must take all of the money out of the account within 10 years.

Both a spouse and a non-spouse inherit the IRA: In this instance of multiple beneficiaries, the original account can be split into two new accounts. That way, each person can proceed by following the RMD and distribution rules for their specific situation.

How Do I Avoid Taxes on an Inherited IRA?

Money from IRAs is generally taxed upon withdrawal, so your ordinary tax rate would apply to any tax-deferred IRA that was inherited, such as a traditional IRA, SEP IRA, or SIMPLE IRA.

However, if you have inherited the deceased’s Roth IRA, which allows for tax-free distributions, you should be able to make tax-free withdrawals of contributions and earnings, as long as the original account was set up at least five years ago (this is known as the five-year rule). As with an ordinary Roth account, you can withdraw contributions tax free at any time.

Common Mistakes to Avoid with Inherited IRAs

Because the rules for inherited IRAs are complex, it can be easy to make a mistake. Here are some common missteps to avoid.

Taking a lump-sum distribution. If you withdraw the entire amount of the IRA at once, you may be pushed into a higher tax bracket and get hit by a significant tax bill. Spreading out the distributions could help you stay in lower tax brackets.

Mixing up the inherited IRA rules before 2020 and after 2020. The rules are complicated and confusing. You need to know what kind of beneficiary you are, what your options are for receiving the inherited IRA, and when you need to start and finish taking distributions. Otherwise, you could face a penalty — or not be taking advantage of certain options you may have. IRS Publication 590-B spells out the rules. You might also want to consult with a trusted tax professional.

Neglecting to take RMDs. The rules regarding RMDs are different depending on the type of beneficiary you are, when the account holder passed away, and if that person had started taking RMDs. Make sure to follow the rules specific to your situation. Consider consulting a financial professional if you’re not sure.

Recent Changes and Updates to Inherited IRA Rules

As noted, the SECURE Act of 2019 introduced some changes that affect how inherited IRAs are handled. Designated non-spouse beneficiaries who inherited an IRA from an account holder who died in 2020 or later must empty the entire account within 10 years after the original owner’s death.

Furthermore, the SECURE 2.0 Act added some additional changes to the 10-year rule. If the original account holder had begun RMDs, beneficiaries must continue to take RMDs yearly, based on their own life expectancy, while emptying the account within 10 years. However, if the account holder had not started taking RMDs, beneficiaries don’t need to make annual withdrawals, but they still must take all of the money out of the account within 10 years.

Eligible designated beneficiaries, a category of beneficiary created by the SECURE Act of 2019, are generally not subject to these changes.

The Takeaway

Once you inherit an IRA, it’s wise to familiarize yourself with the inherited IRA rules and requirements that apply to your situation. No matter what your circumstances, inheriting an IRA account has the potential to put you in a better financial position for your own retirement.

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FAQ

Are RMDs required for inherited IRAs?

In many cases, RMDs are required for inherited IRAs. The specific rules depend on the type of beneficiary a person is, whether the account holder died before or after 2020, and if they started taking RMDs before their death.

Spouse beneficiaries can generally take RMDs based on their own life expectancy and stretch the withdrawals over their lifetime. Designated non-spouse beneficiaries of an account owned by someone who passed away in 2020 or later may or may not need to take annual RMDs, depending on whether the original account holder had started taking them. But either way, they have to completely empty the account with 10 years.

What are the disadvantages of an inherited IRA?

The disadvantages of an inherited IRA include: knowing how to navigate and follow the complex rules regarding distributions and RMDs, and understanding the tax implications and potential penalties for your specific situation.

How do you calculate your required minimum distribution?

To help calculate your required minimum distribution, you can consult IRS Publication 590-B. There you can find information and tables to help you determine what your specific RMD would be.

How should multiple beneficiaries handle an inherited IRA?

If an inherited IRA has multiple beneficiaries, one way to handle it is to split it into different accounts — one for each beneficiary. Then the individual beneficiaries can each decide what to do with the funds.

One thing to keep in mind, though, is that if the account holder died in 2020 or thereafter, all assets must be withdrawn from the accounts of non-spouse designated beneficiaries within 10 years.

What are the options for a spouse inheriting an IRA?

A spouse inheriting an IRA has several options, including taking a lump-sum distribution, rolling the funds over to their own IRA account, opening an inherited IRA, and disclaiming or rejecting the inherited IRA, in which case the next beneficiary would get it.

Spouse beneficiaries will likely want to consider the possible tax implications of each option and how RMDs will need to be handled if they roll the funds over into their own account or open an inherited IRA. It may be wise for them to consult a financial professional.

Can a trust be a beneficiary of an IRA?

Yes, a trust can be a beneficiary of an IRA. In this case, the trust inherits the IRA and the IRA is maintained as an asset of the trust and managed by a trustee. A trustee is required to follow the wishes of the deceased, which might be an option for an account holder with young children or dependents with special needs.

However, there are disadvantages to having a trust as the beneficiary of an IRA. For example, if the original account holder had not begun taking RMDs before their death or the account is a Roth IRA, trust beneficiaries must typically fully distribute all assets within five years of the account owner’s death.


About the author

Ashley Kilroy

Ashley Kilroy

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


Photo credit: iStock/shapecharge

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What Is a Wholesale Club?

What Is a Wholesale Club?

Wholesale clubs or warehouse clubs offer shoppers the opportunity to buy items in wholesale quantities at discounted prices, typically in exchange for an annual membership fee.

Shopping wholesale is a tactic favored by the frugal and thrifty, since in theory, bulk buying usually results in a lower unit price. But are wholesale clubs worth it? Can you truly save enough to make it worth the annual fee, not to mention the massive packages of soap and cereal in your closets?
Understanding how warehouse club shopping works can help you decide if it makes sense for you. Read on to learn the pros and cons of wholesale clubs.

Key Points

•   Wholesale clubs offer bulk buying at lower per-unit prices in exchange for an annual membership fee.

•   Additional perks may include discounts on insurance, gas, travel, and vision/hearing-aid services.

•   BJ’s, Costco, and Sam’s Club offer varying membership costs and benefits.

•   Membership fees range from $50 to $55 for basic tier; $110 to $130 for premium tier.

•   The value of a club membership will depend on usage and lifestyle.

How Does a Wholesale Club Work?

A wholesale club works by offering consumer goods in large quantities at wholesale prices. So, rather than buying a six-pack of toilet paper for $8.99, you might have the opportunity to purchase 30 rolls in a single package for $29.99.

You don’t have to do too much math to see that you typically save money by buying in bulk. But you might be wondering how wholesale and warehouse clubs make money if they’re charging low prices for their items.

One of the main ways these clubs make a profit is through annual fees. The wholesale club gets your membership fee and in exchange, you get to buy items at a discount. Some wholesale clubs even offer additional incentives, such as discounts on home and auto insurance.

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Wholesale Clubs vs Grocery Stores

Wholesale clubs and grocery stores differ in a few ways.

•   Selection. While both can offer food, household items, and petcare items, the range of products available at a wholesale club may be different than what you’re used to at a grocery store. For example, you may be able to find frozen vegetables in bulk at a wholesale club, but you’ll need to hit the grocery store for fresh veggies.

•   Sizing. Instead of buying one can of crushed tomatoes for pasta sauce at a grocery store, you might be buying a case of eight at the wholesale club. Or the 48-ounce orange juice you buy at the grocery store may only be available in a 96-ounce size at the warehouse club.

•   Membership.Grocery stores don’t charge a membership fee. Anyone can walk into a grocery store and shop. Without a membership pass, however, you generally won’t be able to shop at a wholesale club. Not having to pay a fee might appeal to you if you’re used to grocery shopping on a budget.

Factors That Determine if a Wholesale Club Is Worth It

While many people enjoy shopping at warehouse clubs, these retailers aren’t necessarily right for everyone. If you’re debating whether joining a wholesale club makes sense, here are some factors that can determine if it’s worth it to you:

•   Membership fee. The first thing to consider is the fee you’ll pay to shop. If you can’t easily make the fee back in savings, then a wholesale club might be a waste of money.

•   Discounts. To gauge how much savings you might net, you’ll need to look closely at the size of the discounts. This can involve a little homework as you’ll need to compare unit prices for the items you typically buy at the grocery store to unit prices for the same items sold at wholesale clubs.

•   Time savings. In addition to the financial aspect, consider whether shopping at a wholesale club would save you time. Will you be able to get in and out quickly and make fewer trips by buying in bulk? Or will you eat up an entire day wandering the aisles of a giant warehouse full of stuff?

•   Returns. If you change your mind about a bulk purchase, it’s important to know whether you’ll be able to return it and get your money back. What if you buy a 12-pack of laundry detergent and discover it’s not the unscented kind you like? Would you be stuck with it? Different wholesale clubs have different policies regarding what they will and won’t take back.

•   Usefulness. Buying 20 apples or four pounds of quinoa at rock-bottom prices might seem like a deal, but it’s important to consider how much use you’ll get out of those items. If you don’t frequently eat or use the things you’re buying in bulk at a wholesale club, then you’re essentially throwing money away.

•   Extra savings. Aside from potentially saving money on food and other items, consider whether you can get a break on anything else you typically buy. For example, some warehouse clubs sell gas at prices that are typically several cents lower than regular gas stations. You might also be able to pick up free samples of items or, as mentioned above, get discounts on home and auto insurance.

If you only plan to hit the warehouse club every few months, then you might not get the full range of benefits from your membership. On the other hand, if you’re a more regular shopper with a large family, a wholesale club membership could pay itself back (and beyond) in savings.

Advantages of a Wholesale Club

If you’re wondering what are wholesale clubs good for, consider some of the benefits that come with membership.

Lower Prices and Bargains on Certain Products

One of the chief selling points of wholesale clubs is their prices. Wholesale clubs can limit markups on products by selling them in bulk (and charging membership fees). So while a grocery or regular big-box store might mark up items 25% to 50%, a wholesale club might cap its markup at 15%.

Wholesale clubs may also offer special deals on certain items that can’t be matched anywhere else. For example, you might be able to take advantage of online-only exclusive coupons or savings.

Brands Can Be Higher Quality

You might assume that just because you’re buying items in bulk or at discounted prices at a wholesale club, they’re cheap and perhaps not top-notch. That’s not necessarily the case. Warehouse clubs can and do sell quality, name-brand items. This is not limited to grocery or household items. You can also find brand-name tires, electronics, and appliances for sale at wholesale clubs.

Having Access to Services

If you’ve never joined a wholesale club, you might not be aware that they can offer services beyond just shopping. For instance, you might be able to order checks through your wholesale club, get pet insurance, sign up for identity-theft protection, get a garage-door opener installed, or get business cards printed at discounted rates through your membership.

Depending on the club, you might also be able to get access to car-buying programs, vision and hearing-aid services, banking services, home renovation and repair services, or special discounts on travel. All of these things can help to increase the value that you’re getting in exchange for your membership fee.

Disadvantages of a Wholesale Club

Shopping a wholesale club can take some getting used to if you’re primarily used to shopping at grocery stores or big-box retailers. And there are a few potential drawbacks to know before signing up.

Membership Fees

As mentioned, one thing that sets wholesale clubs apart from other retailers is the membership fee. The amount you pay and the perks the fee unlocks will depend on which club you join.

Here’s how the fees compare at three of the top wholesale clubs in the U.S. for basic and premium plans:

•   BJ’s – $55/year for Club Card Membership; $110/year for Club+ Card Membership

•   Costco – $65/year for Gold Star Membership; $130/year for Executive Membership

•   Sam’s Club – $50/year for Club Membership; $110/year for Plus Membership

Keep in mind that you’re not limited to joining just one club. But you’ll need to pay each one’s membership fee. And you generally need the higher-tier membership to take advantage of the full range of features and benefits a wholesale club offers.

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Having to Buy Many Items in Bulk

While not every item is sold in bulk at a wholesale club (you wouldn’t buy five air conditioners, for example), many of them do come in multi-unit packages. So before you shop, you need to be reasonably sure that you’re going to use all of what you buy. If you’re not into stockpiling or you don’t know someone you can split your purchases with, they could just end up cluttering up your home and costing you money.

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Higher Potential for Impulse Buying

Part of the lure of the wholesale club is the opportunity to get a great deal. But that could lead to impulse buys if you spot something on sale at a price that seems too good to be true. While you might save if you can find true bargains, you’re not really saving if the money you spend isn’t in your budget. If you’re struggling with how to stop impulsive spending, then a wholesale club membership might be a stumbling block to your efforts.

Tips for Shopping at a Wholesale Club

If you’re heading out to your local wholesale club to shop for the first time, it helps to know some insider tips to make the most of your shopping experience. Here are a few pointers for getting the most value when buying from a warehouse club:

•   Pre-shop at home. Checking out your wholesale club’s website can give you an idea of what’s in stock at your local store and what kind of deals you’ll find once you get there. You can also look for exclusive online-only offers that might be worth scooping up.

•   Compare unit prices. Unit price is everything when you’re buying in bulk to save money. So as you shop, note the unit price (if posted) or calculate it yourself on your phone. You can then compare that to the price you’d pay for the same item at your local grocery store.

•   Watch out for sizing. What’s known as shrinkflation is a real threat to your wallet when prices are on the rise. This practice occurs when companies downsize items but charge the same price for them. Again, you’ll want to look at the unit price to see how much value you’re getting for your money when shopping wholesale clubs.

•   Take advantage of freebies. Wholesale clubs commonly offer freebies and free samples to shoppers. So be on the lookout for those as you’re cruising the aisles.

•   Shop with a list. Shopping with a list can be an easy way to curb impulse spending. The key is committing to buying only what’s on your list and not being swayed over by any surprise deals you come across.

•   Consider splitting the trip. If you have a friend or family member who doesn’t have a wholesale club membership, you could still take them along with you to shop. You can pick out items together, purchase them using your membership, then split the cost. That way, you’re only getting what you need, and they get a deal at the same time.

Also, you might consider upgrading to a premium membership if doing so could help you to earn rewards on purchases. If you can get 2% of what you spend back, for example, it might be worth it to pay a higher annual fee for that added savings.

Recommended: How to Save Money: 33 Easy Ways

Are Wholesale Clubs Worth It?

Whether a wholesale club is worth it to you or not really depends on your lifestyle and shopping habits. For example, if you often rely on takeout because there’s no food in the house, buying staple items like frozen chicken breasts, frozen veggies, rice, and oil in bulk could allow you to make more meals from scratch. It’s generally cheaper to buy groceries than eat out.

The Takeaway

Buying groceries in bulk can lead to significant savings, since warehouse clubs typically offer generous discounts per unit when you purchase items in large quantities. However, these stores generally require memberships. Annual fees can run from $50 to $130 per year, depending on the club you join and whether you choose a basic or premium tier. If you’re able to save more than you spend on annual dues, joining a wholesale club may be financially worth it. If, on the other hand, you could potentially come out behind, or find that combing the aisles of these stores often leads to impulse purchases, it’s probably not a good deal.

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FAQ

How do wholesale clubs make money?

Wholesale clubs primarily make money by charging membership fees. Since they don’t charge the same high markups on items as other retailers, they use membership fees to make up the difference in their profits.

What services do wholesale clubs provide?

Wholesale clubs can provide a variety of services, including pet insurance, home and auto insurance, life insurance, home-improvement services, travel services, and vision services. The range of services offered will depend on which warehouse club you join, and whether wholesale clubs are worth it will depend on the annual fee and how well the perks line up with your spending habits and lifestyle.

What are some common wholesale clubs?

BJ’s, Costco, and Sam’s Club are among the most well-known wholesale clubs in the United States. Boxed.com is an online store that sells wholesale items, with no membership fees. Alibaba is another online wholesaler that ships a wide variety of items to buyers around the world.


About the author

Rebecca Lake

Rebecca Lake

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



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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Checking & Savings Fee Sheet for details at sofi.com/legal/banking-fees/.

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

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Why Did My Credit Score Drop 100 Points for No Reason?

Credit scores measure your financial health at a given point in time. Ideally, your score increases as you build your credit history, so a sudden decline can leave you wondering why.

Several things can cause a credit score to fall 100 points (or more), and late payments are often at the top of the list. Here’s a closer look at why credit scores decrease. 

Why Did Your Credit Score Drop 100 Points?

A credit score can drop by 100 points or more when there’s a significant change to your credit reports. Possible reasons for a credit score drop of 100 points or more include:

•   Late payments

•   Missed payments

•   High balances relative to your credit limits

•   Reduced credit limits

•   Delinquencies and collection accounts

•   Bankruptcy filing

•   Foreclosure or repossession

•   Judgments

•   Multiple inquiries for new credit in a short timespan

•   New credit accounts in your name1

These types of items can drag your score down. Paying off loans or closing credit card accounts can also cost you credit score points, even though you might consider them positive financial steps. 

Identity theft and fraud can trigger a sizable drop in your credit score as well. If someone uses your identity to obtain loans or open lines of credit without your knowledge, that could leave you vulnerable to late or missed payments, delinquencies, and collection actions. A money tracker app can help you keep tabs on your credit score, and you’ll also get updates when it changes. 

Track your credit score with SoFi

Check your credit score for free. Sign up and get $10.*


Should You Be Worried About Your Credit Score Dropping?

A credit score drop can be worrisome, especially if you weren’t expecting it. You may have cause for concern if you:

•   Plan to apply for a mortgage or another type of loan soon

•   Would like to refinance an existing debt that you have at a lower interest rate

•   Suspect that someone may be using your identity to obtain credit fraudulently

Fluctuating credit scores could make it more difficult to get approved for new loans. If you are approved, a lower score could result in a higher interest rate. 

Identity theft is a more serious matter. You may not even be aware that someone is using your identity to obtain credit in your name until you’re denied credit, or worse, sued for an outstanding debt you didn’t create. 

Reasons Your Credit Score Went Down

Why did my credit score drop by 100 points for no reason? The short answer is that it didn’t. There must be some change to your credit report to result in a score decline. 

Changes that can show up on your credit reports include:

•   New accounts opened in your name

•   Account closures

•   Changes to your balances or credit limits

•   Payment activity, including late payments or missed payments

•   Delinquencies and accounts that are sent to collections

•   Paid off balances

•   Debt settlements, in which your creditors agree to let you pay off less than what you owe

•   New inquiries for credit1

Inaccurate information can also harm your credit. Between 2021 and 2023, consumer complaints about credit report errors increased by 168%, according to the Consumer Financial Protection Bureau (CFPB). Credit report errors can range from payments being incorrectly reported to accounts listed as belonging to you that are not yours.2 

In some cases, a credit score drop might be caused by someone else. This can happen when you cosign a loan for someone. As the cosigner, you’re legally responsible for the debt. Any activity relating to the account, including late or missed payments, can show up on your credit report.3 

What Can You Do If Your Credit Score Dropped by 100 Points?

If your credit score drops by 100 points or more, the first thing to do is determine why. Obtaining copies of your credit reports can shed some light on what may be causing the decline. 

Here are some things to look for as you review your reports:

•   Missing or incorrect payment history

•   Incorrect balance information

•   Accounts that don’t belong to you

•   Collections for debts that don’t belong to you

•   Loan accounts you’ve paid off that still show a balance

•   Open accounts that are listed as closed or vice versa

•   Duplicate debts, meaning the same account is listed multiple times

If you identify what you believe is an error or inaccuracy, you have the right to dispute it with the credit bureau that’s reporting the information. Equifax, Experian, and TransUnion — the three major credit bureaus — all allow you to initiate credit report disputes online.4 

Why did my credit score drop over 100 points when there were no errors? That’s trickier to answer, as it depends on the information in your credit file. If there are no errors or inaccuracies, then you’ll need to consider things like payment history, credit limits, and debt balances to see if they’ve had any impact on your score. 

Examples of Credit Score Dropping

Hopefully, you never have to deal with a major credit score drop. But it may help to have some examples of what can cause your score to go down. 

•   You’re ready to buy a home and are shopping for a mortgage lender. You find the one you want to work with and apply for a loan. You’re approved, but the new inquiry and associated debt on your credit reports lead to a score drop. 

•   You cosign a car loan for your niece, on the promise that she’ll make the payments on time. She loses her job but doesn’t tell you and the loan payments go unpaid for six months. The lender repossesses the vehicle, which lands on your credit report and costs you credit score points. 

•   You make the final payment to your student loans. The account is now listed as closed and paid in full on your credit reports, but it lowers your score. 

Again, not all things that lead to a credit score drop are negative. Paying off debt, for example, is something to celebrate even though it can ding your credit to a degree. 

How to Build Credit

How long does it take to build credit? There’s no simple answer, as it can depend on what you’re doing (or not doing) to recover lost credit score points. 

Some of the most effective strategies for building credit include:

•   Paying bills on time to establish a positive payment history

•   Keeping the balances on your credit cards low or paying in full each month

•   Paying down debt that you already have

•   Periodically requesting credit limit increases from your credit cards (but not running up new debt against them)

•   Leaving older credit accounts open, even if you don’t use them

•   Using different types of credit, such as loans and credit cards

•   Limiting how often you apply for new credit

You can also build credit as an authorized user on someone else’s credit card. Authorized users have charging privileges on the card and account activity will show up on their credit reports, but they’re not legally responsible for the debt.5

Having a checking or savings account typically doesn’t affect credit scores. Banks can, however, report negative activity related to closed accounts to ChexSystems, a consumer credit reporting agency. A negative ChexSystems report could make it difficult to get approved for a new bank account. 

Allow Some Time Before Checking Your Score

If you recently checked your credit following a score drop, you may want to wait a while before checking it again. Credit scores change when there’s new information added to your credit reports, whether it’s something positive or negative. 

It may be helpful to check your credit monthly or quarterly if you’re working on rebuilding your score. That way, you can track your progress against any steps you’re taking to improve your score to see what’s working. 

At a minimum, it’s a good idea to check your credit at least once annually. That can allow you to see what’s changed over the last year and look for any suspicious or potentially fraudulent activity. 

Pro tip: Use a free credit monitoring service to get regular credit score updates

Recommended: How to Check Your Credit Score Without Paying

Closing a Credit Card Account Can Hurt Your Score

Closing credit cards can hurt your score if you still owe a balance at the time you close the account. Your credit utilization ratio measures how much of your available credit you’re using. When you close a credit card with a balance due, you automatically increase your credit utilization ratio.6

For example, let’s say you have a combined credit limit of $20,000 across five credit cards. You owe $6,000 in total debt to your cards, which makes your credit utilization ratio 30% ($6,000 / $20,000 = 0.3).

Now, assume that you owe $5,000 to one card alone. That card has a credit limit of $10,000. You close it, cutting your total credit limit in half. Now you have a credit utilization ratio of 60% ($6,000 / $10,000 = 0.6).

Some experts say that 30% or less is an ideal credit utilization ratio to aim for, while others target 10% instead. The main thing to remember is that the lower your credit utilization is, the less harmful changes can be to your score. 

In terms of how to lower credit utilization, you can do so by paying down credit card balances and/or increasing your credit limits. 

What Factors Impact Credit Scores?

If you’re wondering what affects your credit score, it’s not just one thing. FICO credit scores, which are the most commonly used among top lenders, are determined by five factors. 

•   Payment history: 35% of your score

•   Credit utilization: 30% of your score

•   Credit age: 15% of your score

•   Credit mix: 10% of your score

•   Credit inquiries: 10% of your score7

VantageScores are based on some of the same factors, though they’re calculated differently. The VantageScore model was developed by the credit bureaus as an alternative to FICO scores. 

Pros and Cons of Tracking Your Credit Score

Tracking your credit score can be beneficial but there are some potential downsides. Here’s a quick look at the advantages and disadvantages. 

thumb_upPros:

•   Monitor your progress over time

•   Get to know which factors are helping or hurting your score the most

•   Easier to spot suspicious activity or potential fraud

thumb_downCons:

•   You may feel frustrated if your score isn’t climbing as quickly as you’d like

•   Checking your score too often could cause you to obsess over even minor changes

•   Keeping up with multiple credit scores could get confusing

Recommended: Why Did My Credit Score Drop After a Dispute?

How to Monitor Your Credit Score

Credit score monitoring services make it easy to track your credit scores and get notifications when there’s a change to your credit report. SoFi, for instance, offers free weekly credit score updates and access to a certified financial planner if you have questions about credit score changes. 

Regardless of which service you use to monitor your credit, keep track of changes as they’re reported. Specifically, look at which changes are positive and which are negative. That can guide you toward what you might need to do to improve your score. 

The Takeaway

Seeing your credit score drop by 100 points or more can be disheartening, but it’s not the end of the world. There are things you can do to get your score back on track. 

Tracking your money is a good place to start. Tools like a spending app connect all of your accounts in a single dashboard so you can understand the factors that are influencing your credit scores. You can also check your scores for free. It’s a simple way to take charge of your financial health while you work on building good credit. 

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

Why did my credit score drop 100 points when nothing changed?

It may seem as if nothing has changed on your credit reports, but there must be some type of change for your score to be affected. If your score dropped, take time to review your credit reports thoroughly. Even a seemingly minor change, such as a new credit inquiry, could make a dent in your score. 

Why is my credit score going down if I pay everything on time?

Paying bills on time can help add points to your score, but it might still go down if you have a high credit utilization or apply for new credit frequently. Closing accounts could also hurt your score, even if you pay on time. Using a spending app to track bills and expenses can help you stay on top of your due dates.

How to dispute a credit score drop?

You can’t dispute a credit score drop, but you can dispute the information on your credit reports that you believed caused the drop. Keep in mind, however, that disputing credit report information isn’t guaranteed to improve your score. 


About the author

Rebecca Lake

Rebecca Lake

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



Photo credit: iStock/kate_sept2004

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .


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

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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

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Investment and Financial Brokers Explained

A number of investors trade stocks and bonds through an investment broker. What is a broker? A broker, or brokerage firm, is the middleman between the buyer and seller and can help make a transaction go smoothly. But an investment broker is not strictly necessary. Some companies offer a direct stock plan, allowing investors to purchase shares straight from the company without a broker.

In order to decide if you need an investment broker, it’s essential to know how a broker works, what exactly they do, and how to shop around for one that fits your needs.

Key Points

•   Investment brokers assist with buying and selling securities, ensuring transactions are legitimate and handling necessary documentation.

•   Brokers include full-service, discount, online, and robo-advisors, each with unique features.

•   Using a broker provides accessibility and expertise but involves fees and potential conflicts of interest.

•   Investment accounts vary, including taxable brokerage, retirement, and college savings plans.

•   Choosing a broker requires comparing fees, account minimums, and the level of guidance offered.

What Is an Investment Broker?

Investment brokers enable individuals to buy and sell financial securities, like stocks or bonds, on an exchange market. It’s really as simple as that. Though brokers do have several varying roles and responsibilities, and can offer a number of services to their clients.

Roles and Responsibilities

Reputable brokers act as a boon to both buyers and sellers: They ensure that each party actually has the money to buy assets or the assets to sell.

Brokers settle trades by delivering securities and payments to each party, while also taking care of all the bookkeeping and tax-related documentation required. In many cases, going through a brokerage firm may be the easiest and most accessible way for individuals to get started with investing.

Types of Brokerage Accounts

There are many kinds of brokerage accounts to choose from. For instance, you may want to choose between a brokerage account vs. a cash management account, both of which are offered by brokerages.

The best product or service for you will depend on your individual financial goals and your budget. Here’s what you need to know to help make an informed decision.

Full-service Brokers

Along with the ability to buy and sell assets, a full-service brokerage account might also include advice from human financial planners and portfolio management to help you make the best investment decisions possible.

However, these perks often don’t come cheap. Full-service brokerage accounts and wealth-management companies usually calculate their charges as a percentage of your total portfolio, and may have account minimums as high as $250,000. They may also collect trade commissions and annual management fees.

Discount Brokerages

Discount brokers offer less consultation and guidance, allowing you to DIY your investment portfolio cheaply. Many have $0 account minimums and may charge less than $10 per trade, or even offer commission-free assets trading.

Both full-service and discount brokerages typically offer both cash and margin accounts. In a cash account, you’ll need the actual cash to buy your assets. In contrast, in a margin account, the broker will lend you some capital to make purchases, using the securities you already own as collateral.

Online Brokers

Many investors today are likely familiar with online brokerages, as there are numerous platforms that allow users to buy and sell stocks or other securities. Many of them don’t charge commissions, either. Online brokers often offer the ability to buy or sell securities, and in some cases, trade derivatives, too.

Robo-Advisors

Robo-advisors aren’t really “brokerages” per se, but more of a service that may be provided by brokers. They’re effectively highly sophisticated robot brokers — they may conduct trades automatically for users or clients, rebalancing their portfolios or allocating their money based on the investor’s risk tolerance and other factors. Some brokerages offer robo-advisory services, and some do not. In some cases, there may be humans in the mix that help with portfolio curation, but it may be a good idea to explore the specifics depending on which broker you’re thinking of using to make sure.

Pros and Cons of Using an Investment Broker

As with any financial service, there are both benefits and drawbacks to using a brokerage firm to facilitate your trades.

Pros of Using a Broker

Some of the pros of using a broker include accessibility, simplicity, and expertise.

Accessibility

Thanks to the internet, you can open a brokerage account in minutes and start trading stocks as soon as your account is funded. That means employing a financial broker is one of the easiest ways to start an investment journey as quickly as possible.

Simplicity

When you buy and sell through a broker, a lot of the tedious footwork — like keeping tabs on your interest earnings for tax purposes — is taken care of for you. Depending on the type of brokerage firm you go with, you may also have access to professional financial advice and other advisory services that could help you make the most of your portfolio.

Expertise and Guidance

Brokers are professionals, and have experience in the market. That is, they may be able to offer a helping hand at times, which may be worthwhile to new or beginning investors who are still getting their sea legs.

Cons of Using a Broker

There can also be drawbacks to using a broker, such as fees and required minimums.

Fees and Commissions

Although they’ll vary based on the specifics you choose and the type of account you open, some brokers charge maintenance fees and trade fees — also known as commissions — which can eat away at your nest egg. In fact, the average stock broker commission charged by brokerage firms is usually 1% to 2% of the value of the total transaction.

That said, you can minimize your investment fees, or even eliminate them, by shopping around for brokers with the lowest costs. For example, many online brokers offer no commission trading.

Required Portfolio Minimums

Although it’s not true of every brokerage firm, some require you to keep a minimum amount of money in your account to use their services. These minimums might be $1,000 or more, which can be a barrier to entry for some beginner investors.

Potential Conflicts of Interest

It’s possible that a broker may have conflicts of interest, in that they may be a part of a broad organization or large company that has many clients. As such, they could have an interest in having investors invest in certain companies, assets, or more — and it may not even be intentional. The point is, it’s possible that these conflicts could exist, and investors should be aware of them.

How to Choose the Right Investment Broker

There’s no one way to choose the right investment broker, as it’ll largely depend on your specific needs and financial situation. That said, you can keep some general guidelines in mind when making a choice. That can include:

•  What your needs are (what are you looking to trade, specifically?)

•  What your financial goals are

•  Any fees or commissions that the broker may charge

•  Which specific products and services the broker offers

•  How easy they are to work with

•  How much guidance you want or need as an investor.

Different Types of Investment Accounts

Aside from deciding what type of brokerage you’d like to do business with (and how much you’re willing to pay for financial services), you’ll also need to decide what type of investment account works best for your goals.

Maybe you’re investing for a shorter-term objective, like purchasing a house, or perhaps you’re trying to ensure you’ll have a comfortable retirement. Either way, specific investment account types, or “vehicles,” are designed to help you get there.

Recommended: Understanding a Taxable Brokerage Account vs an IRA

Taxable Brokerage Account

Think of this as a default investment vehicle. It may be a good choice if you’re looking to grow wealth and want to be able to add or withdraw funds on your own terms without waiting to reach a certain age or life circumstance. However, you pay taxes on earnings, so there are no tax advantages to this type of account. If you don’t make any specific investment vehicle choices when you open your brokerage account, this is most likely the one you’re getting.

Individual Retirement Account (IRA)

An individual retirement account, or IRA, is a type of investment account designed specifically for retirement goals and is available to self-employed people and those working for a company. IRAs carry specific tax incentives; for example, contributions to traditional IRAs are deductible. While Roth IRAs allow for tax-free distributions. However, you can’t access the funds without paying a penalty until you reach age 59 ½ or meet certain circumstantial requirements, such as purchasing your first home.

Roth IRA

Roth IRAs are similar to traditional IRAs, with the key difference being that contributions are made with after-tax dollars, meaning that the money in them can be withdrawn tax-free. As such, there may be some advantages for investors to use a Roth IRA versus a traditional IRA, though it may be best to confer with a financial professional to get a sense of which may be a better investment vehicle given your situation.

401(k) Accounts

There are also 401(k) accounts, which are employer-sponsored retirement plans that are similar to IRAs, in some ways. Employees can contribute a portion of their paychecks to a 401(k), and some employers will even match their contributions up to a certain percentage. There may be tax advantages, too.

Regulations for Investment Brokers

Investment brokers need to abide by some rules, most notably, those set forth by regulators like the Securities and Exchange Commission (SEC), and FINRA.

FINRA and SEC Oversight

Investment brokers are regulated by the Financial Industry Regulatory Authority (FINRA). Brokers must register with FINRA, and they are required to follow a standard of conduct known as the suitability rule. Under this rule, brokers need to have suitable grounds for recommending particular investments to clients.
Brokers also need to register with the SEC, which oversees regulatory efforts for the industry.

Fiduciary Responsibility

Brokers also have a fiduciary responsibility, which means they are required to act in their client’s best interest. So, if a broker can talk a client into buying a bunch of assets, which may be to their detriment, while raking in commission fees, they could find themselves in trouble.

Alternatives to Investing With a Broker

Although using a broker to invest in the stock market might be a smart money move for some, there are other ways to get started with investing, including the following options.

Recommended: Buying Stocks Without a Broker

Automated Investing

Automated investment products, or robo-advisors, are platforms that utilize a combination of computer algorithms and human financial planners to create and manage diversified portfolios at low costs to users.

Your funds will be invested in a diversified portfolio, and the platform typically offers goal-planning tools and rebalancing services to help keep your funds moving in the right direction.

If you don’t want to pay the high prices for a full-service broker, but self-managing your portfolio makes you more than a little nervous, a robo-advisor may be right for you.

Buying Stocks and Fractional Shares Directly

Depending on whose stocks you’re interested in purchasing, you may be able to buy them directly from the issuer without needing to go through a brokerage firm.

It pays to read the fine print, however: Buying stocks directly may save you money on trade commissions, but you may also be subject to proprietary fees from the company or minimum purchase amounts. And if you’re buying fractional shares (fractions of shares of stock), you need to have an investment account, such as one with an online broker or robo-adviser.

Diversifying your assets can still be helpful for investors who buy stocks directly. If all of your investments are tied up in a single company, you may not be in a great position if that company begins to falter. In contrast, if you’ve invested in several different firms and other asset classes, you will likely have a wider margin for error.

Choosing Alternative Investments

Although the stock market is one of the most popular ways to invest, there are plenty of other ways to try turning your money into more money.

You might consider exploring alternative investments. For example, you could invest in real estate and sell the property at a profit or turn a condo into a passive income source by putting it up for rent. Or you might invest in art; the value of paintings is not necessarily correlated with the behavior of the stock market, giving it the potential to rise even during a stock market crash.

That said, many alternative investments require significantly more time, work, and know-how than crafting a diversified portfolio of stock market assets. And as always, every investment involves risk. There’s no such thing as a sure thing.

Direct Stock Purchase Plans (DSPPs)

Further, investors can check out whether they can participate in a direct stock purchase plan, or DSPP, which allows investors to buy stock directly from the stock-issuing entity. This way, investors don’t need to deal with a broker at all, they can go directly to the source and purchase stock.

The Future of Investment Brokerage

What does the future hold for investment brokers? Nobody knows for sure, but it’s likely that the entire field will evolve in the coming years, as much of the financial space has. Technology keeps evolving and rapidly changing, and the introduction of artificial intelligence and perhaps, in the future, quantum computing capabilities, may give investors new abilities that were unimaginable a few years ago.

We’re not sure exactly what that will look like, but it’s likely a safe bet that the field will continue to see rapid change

The Takeaway

If you’ve decided stock market investments are the right move for you and your money, going through a broker can be a relatively simple and low-cost way to gain access to the market. However, if you’d rather avoid potential downsides, like fees or required account minimums, you may want to consider the option to invest directly. The choice is yours.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is the role of a stock broker?

A stock broker is a financial professional who buys and sells stocks on behalf of clients. A broker generally earns a fee or commission for their services.

How do brokers make money?

Brokers typically work on commission. The average stock broker commission is usually 1% to 2% of the value of the total transaction.

Why do people use brokers?

People use brokers to help them buy and sell stocks and bonds. For many individuals, using a broker is the easiest way to start investing.

How much money do I need to start investing with a broker?

How much you need to start investing with a broker depends on the specific broker or brokerage. Some may not have minimum amounts, while others may have relatively large or high balance requirements.

Are online brokers safe to use?

While there’s no guarantees in the financial world, and there’s certainly nothing that’s “safe,” most brokers are relatively low-risk, so long as they abide by regulatory standards and are registered with the proper authorities. That said, it may be a good idea to do some research before signing up.

Can I switch brokers easily if I’m not satisfied?

Yes, you can open up new or different brokerage accounts with other brokers.



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

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

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Student Loan Hardship Forgiveness Plan

Student loan hardship forgiveness was a plan that could have offered relief to federal student loan borrowers who faced “persistent financial burdens” like medical bills, natural disasters, and child care. Former President Biden sought to help relieve this financial burden through a hardship-based student loan forgiveness plan that he proposed while still in office.

The plan was ultimately pulled from consideration shortly before the Biden administration transitioned out of the White House. Here’s what to know about the proposed hardship forgiveness for student loans, plus other options for student loan borrowers dealing with financial hardship.

Key Points

•   The Biden administration’s proposed student loan hardship forgiveness plan aimed to provide relief to federal student loan borrowers who were facing significant financial burdens.

•   Automatic one-time forgiveness would have been offered to those with an 80% chance of default, based on financial indicators.

•   An application-based forgiveness option would have allowed others to apply if not eligible for automatic relief.

•   The plan was withdrawn in December 2024 due to operational challenges and limited time left in the administration’s term.

•   Other student loan forgiveness options include income-driven repayment plans, although applications for these plans are on hold as of March 2025.

Understanding the Hardship Forgiveness Plan

In 2022, President Biden proposed a sweeping student loan cancellation plan that promised qualifying borrowers up to $20,000 in loan cancellation. The plan was blocked by the Supreme Court in 2023. Following the court’s decision, the student loan relief initiative was reworked by the administration into a student loan forgiveness plan, known as Plan B. The student loan hardship proposal was part of Plan B.

Overview of the Initiative

The student loan hardship forgiveness proposal was designed to offer relief to borrowers who were struggling with ongoing financial challenges. It enabled access to hardship forgiveness for student loans through two pathways:

•   Automatic one-time forgiveness: In this pathway, if the Department of Education, using a “predictive assessment,” determined that a borrower had at least an 80% chance of defaulting on their student loan debt within two years, it may have automatically forgiven the loans on a one-time basis.

•   Application-based forgiveness If borrowers did not qualify for the automatic student loan hardship forgiveness, they could submit an application that would “holistically assess” how likely they were to default or experience severe and persistent financial hardship.

Eligibility Criteria

For a borrower to qualify for automatic forgiveness, an assessment of varying indicators would be done by the Secretary of Education. If the assessment determined that a borrower’s loans had at least an 80% likelihood of going into default in the following two years, they would qualify for hardship forgiveness under the proposed rule.

Some of the indicators used to assess automatic forgiveness included:

•   Income

•   Total debts owed

•   High costs associated with medical bills

•   Child care and other essential expenses

•   Whether the borrower had qualified for a Pell Grant

Under the application-based forgiveness, borrowers would need to demonstrate that they faced a high probability of loan default or other severe negative outcome if the hardship forgiveness wasn’t granted. The assessment also had to find that no other student loan payment options would adequately resolve the borrower’s hardship circumstances.

Application Process

Only borrowers experiencing an exceptional financial hardship who did not qualify for the automatic one-time forgiveness would need to complete a student loan hardship application for a holistic assessment.

However, since the hardship-based student loan forgiveness plan was withdrawn before its launch, no formal application was publicly available.

Recommended: Understanding Your Student Loan Statement

Implementation Timeline

The proposal for a student loan hardship forgiveness plan had been in the works for some time under the Biden administration. Here’s what to know about the proposal’s timeline.

Proposed Schedule

If the hardship forgiveness proposal had moved forward, the U.S. Secretary of Education in the Biden administration anticipated finalizing the new forgiveness plan and having it go into effect in 2025.

Legal and Political Considerations

The student loan hardship proposal would have given borrowers facing financial hardship tremendous relief. However, the proposed hardship-based student loan forgiveness plan, like many of the Biden administration’s forgiveness plans, had legal and political opposition.

Legal Challenges

Biden’s student loan hardship forgiveness initiatives were stymied by numerous legal challenges. First, the administration’s initial forgiveness plan that offered up to $20,000 in loan forgiveness was struck down by the Supreme Court in 2023. After that, different iterations of the proposal also faced legal hurdles.

For example, in 2024, seven states — Alabama, Arkansas, Florida, Georgia, Missouri, North Dakota, and Ohio — filed a lawsuit against the Biden administration, alleging that the proposed student loan hardship plan was an overstep of executive power.

Political Climate

In February 2025, the U.S. Court of Appeals for the 8th Circuit ruled that former President Biden’s student loan forgiveness plans were unconstitutional. With the Republican party currently holding the majority in Congress, and President Trump’s executive order in March 2025 to dismantle the Department of Education, a broad student loan hardship forgiveness plan appears unlikely to happen under the Trump administration.

Impact on Borrowers

Had Biden’s proposed hardship forgiveness for student loans been successful, an estimated eight million borrowers would have had their student loan balances erased.

Instead, these borrowers will need to repay their student loans through other alternatives, such as using another repayment plan or consolidating student loans.

Another option some borrowers might consider is student loan refinancing. When student loans are refinanced, the borrower’s current loans are replaced with a new loan from a private lender. Ideally, a borrower may be able to get better loan terms or a lower interest rate, if they qualify.

If you decide to explore how to refinance student loans, just be aware that refinancing federal loans makes them ineligible for federal programs, such as IDR plans and federal deferment.

Recommended: Student Loan Refinancing Calculator

Financial Relief

When borrowers default on their student loans, the remaining balance becomes due upfront, which further compounds their financial challenges. The hardship forgiveness plan would have provided relief to federal student loan borrowers who are at the highest risk of defaulting on their debt.

Credit Implications

With the proposed hardship forgiveness plan, some borrowers in a dire financial situation might have been able to avoid the negative mark of student loan default on their credit record.

Here’s why: A student loan balance that’s forgiven shows up on a credit report as a closed account. This lowers borrowers’ debt-to-income (DTI) ratio, which can impact their access to new credit. A DTI ratio is a formula used by creditors to determine whether an applicant can reasonably make payments toward a new credit account — the lower this percentage is, typically the more favorable it is for borrowers.

Alternatives and Additional Support

For borrowers who are experiencing financial hardship, student loan forgiveness is usually accessible through other federal programs, such as income-driven repayment (IDR) plans. However, as of March 2025, a federal court injunction has prevented the implementation of parts of the IDR plans, and applications for the plans are on hold. You can find out more about this situation and get any updates on the Federal Student Aid (FSA) website.

In the meantime, here is more about these plans and how they typically work.

Income-Driven Repayment Plans

IDR plans offer student loan relief — and ultimately, forgiveness — to borrowers who need lower student loan payments. These plans calculate your monthly payment based on your discretionary income and family size, which must be recertified annually. Depending on the plan, repayment terms are extended to 20 or 25 years, with payments set at 10% to 20% of your discretionary income. After successfully making all payments under your IDR plan, any remaining Direct Loan balance is forgiven.

There are technically four IDR plans, though one of them is no longer available:

•   Saving on a Valuable Education (SAVE) Plan: This plan is no longer available after being blocked by a federal court.

•   Pay As You Earn (PAYE) Repayment Plan

•   Income-Based Repayment (IBR) Plan

•   Income-Contingent Repayment (ICR) Plan

However, as discussed, applications for the PAYE, IBR, and ICR plans are on hold as of March 2025, and the application to change student loan repayment plans to an IDR option is unavailable.

The Takeaway

The Biden administration’s hardship-based student loan forgiveness plan would have forgiven student loan debt for an anticipated eight million federal student loan borrowers. However, the proposal was met with legal challenges and ultimately withdrawn by the administration in December 2024.

Although other federal loan forgiveness options, like forgiveness through income-driven repayment, currently still exist, new applications for these plans are not currently available. Borrowers looking for help managing their student loan debt may want to consider other options.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

Will the forgiven loan amount be considered taxable income?

Whether a forgiven student loan amount is considered taxable income depends on the forgiveness program that granted the loan cancellation. However, the American Rescue Plan Act of 2021 provides federal loan borrowers a temporary federal tax exemption on forgiven student debt through 2025. Just be aware that some states impose a tax liability on forgiven student loans, regardless.

How does the hardship plan differ from previous forgiveness initiatives?

The proposed student loan hardship forgiveness program was unique in that it offered two different pathways for student debt relief. The first was automatic forgiveness qualification for borrowers who demonstrated an 80% likelihood of defaulting on their student loans. The second was a “‘holistic assessment’ of the borrower’s circumstances” in which forgiveness was to be assessed on a case-by-case basis after the borrower submitted an application.

What legal challenges could affect the plan’s implementation?

The Biden administration withdrew the student loan hardship plan in December 2024, citing operational challenges, and the plan is no longer moving forward. In February 2025, the 8th Circuit Court ruled that former President Biden’s overall student loan forgiveness efforts were unconstitutional.


photo credit:iStock/Damir Khabirov
SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FOREFEIT YOUR EILIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers.
Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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