Financial Topics Archives | Page 63 of 823

Q: When will social security run out?

According to a 2020 projection from the Social Security Administration (SSA), workers who reach retirement age after 2034 are projected to receive 76% of scheduled benefits.

Mar

2025

When Will Social Security Run Out?

By Rebecca Lake | Investing, Preparing for Retirement | Comments Off

While it’s unlikely that Social Security will ever run out completely, it is possible, and current predictions are that Social Security will be able to pay out 100% of scheduled benefits until 2033. After that, benefits could be reduced.

Why Social Security is vulnerable to “running out” requires a bit of background into how Social Security works. It’s a good idea to have an idea as to what could happen if Social Security were to run out, too.

How Social Security Works

To get a sense of how Social Security works, it may be helpful to think of the Social Security system as a bucket of water. Current workers pay Social Security tax that’s added to the bucket, while retired workers withdraw their benefits from the resources in the bucket. Throughout Social Security’s history, there was always a surplus of funds – meaning that more people were paying into the system than were withdrawing from it.

Over time, for various reasons — including a smaller pool of younger workers and a longer-living pool of retirees — those excess resources have been slowly depleted. Given the demands on the system, it’s unclear how to keep Social Security functioning unless benefit payouts are reduced, or the government takes some kind of action to remedy the situation.

Social Security can often be described as a “pay-as-you-go” system, meaning that the contributions made by workers now (through the Social Security payroll tax) are actually used to pay the benefits of today’s retirees. Currently some 182 million workers pay into the system, which provides Social Security and Disability benefits for tens of millions people.

When today’s workers retire, the idea is that they will receive benefits based on what the next generation contributes. Any money that’s left over goes into one of two Social Security trust funds.

According to the Social Security Trustees report published in 2024, total costs of the OASI and DI Trust Funds (Old Age and Survivors Insurance, and Disability Insurance) the system began to outstrip total income in 2021, and the reserves of the OASI and DI Trust Funds started declining after that.

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

Understanding Social Security Tax

The amount each individual worker contributes to Social Security depends on their income. Employees who work for a traditional employer split the Social Security tax payment with their employer at 6.2% each up to $168,600 in annual salary, and self-employed workers are responsible for the entire 12.4%.

As employees contribute to the tax, they earn Social Security “credits” — with a max of four per year.

Those employees become eligible for benefits when they reach 40 credits, which equals roughly 10 working years, or they reach full retirement age. For Americans born in 1960 or later, that’s 67 years old.

At What Age Are You Eligible for Social Security?

Getting the most out of Social Security benefits becomes a numbers game as workers get close to retirement age, because workers are technically eligible at age 62. But for each month previous to full retirement age that someone starts drawing benefits, they’re reduced by one-half of one percent.

The benefits stop increasing at age 70, which is generally when workers would be able to get the biggest return on their contributions into the system. But individual decisions should be made on a number of factors, including employment outlook and health.

Recommended: When Can I Retire?

Social Security Trust Funds

After all the contributions have been paid in and benefits paid out, any remaining funds are divided up between two trust funds, divided up between the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund, where they earn interest in government-guaranteed Treasury bonds.

The larger of the two funds, the OASI, pays benefits to retired workers, their surviving spouses and eligible children, and covers administrative and other expenses. It’s the largest fund that takes care of retirees who don’t face special circumstances, and deposits are made daily. It’s been around since 1940.

The smaller DI Trust Fund handles monthly benefit payments to disabled workers and their spouses and children until they’re eligible for full benefits through the OASI.

Even though both funds are a part of the overall federal budget, they’re handled separately and the SSA isn’t allowed to pay out more than what’s in the trust fund.

The Risk of Social Security Running Out

Media headlines in recent years have highlighted concerns over a potential Social Security funding shortfall. But it’s important to separate fact from fiction when understanding how Social Security works.

Myth 1: There Won’t be any Money to Pay Benefits

As mentioned, the odds of Social Security running out of money completely are low. Remember, Social Security is pay as you go with today’s workers paying in funds that are used to provide retirement benefits for today’s retirees.

When you retire, your benefits would be paid by those still working. So unless the system itself is abolished, Social Security benefits would continue to exist and be funded by workers.

Reality: Social Security Surplus Funds May be Exhausted

While workers pay into Social Security, the program also has a surplus of trust funds that it can use to pay benefits, as described earlier. The program has begun using those funds to pay some benefits as of 2021, with payroll taxes continuing to pay the majority of benefits to retirees.

While Social Security itself is unlikely to end, the trust funds may eventually be spent down to $0, which presents the possibility of a reduction in future benefits.

Myth 2: People Who Aren’t Eligible for Social Security can Receive It

Another concern about the possibility of Social Security running out stems from the mistaken belief that undocumented individuals can illegally claim Social Security benefits.

The idea is that some people might unfairly claim benefits they’re not entitled to, putting a burden on the system and reducing benefits for eligible workers.

Reality: Documentation is Required to Obtain Benefits

A Social Security number or Individual Taxpayer Identification Number is required for the Social Security Administration to create a benefits record for a citizen or non-citizen who’s authorized to work in the U.S. Someone who has either could legally obtain benefits through Social Security since they’ve technically paid into the system.

Myth 3: The Current System Can’t Support an Aging Population

As life expectancies increase and the birth rate declines, it’s natural to assume that living longer may affect Social Security’s ability to continue paying out benefits. Someone who’s 25 now, for example, may be wondering what year will Social Security run out, and how will it time up with my retirement?

Reality: Social Security Can Adapt

While there’s little the government can do to change the demographic makeup of the population, lawmakers can be proactive in proposing changes to Social Security. That includes measures that can help to preserve benefits for as many workers as possible while minimizing the odds of running out of funding.

Problems With Social Security

Because benefit payouts are tied to the SSA’s reserve balance, it begs a question for many working Americans — what happens when that balance hits zero? The SSA itself acknowledges that benefits will likely only be available in full until 2033.

Reasons for the depletion of fund reserves are attributed to a number of challenges, including a rise in program costs. Cost-of-living adjustments, or COLA, have been steadily increasing. Life expectancy for Americans has grown longer, while the number of workers hasn’t kept pace with the number of retirees.

How to Avoid Social Security Running Out

Lawmakers, financial experts, and retirement advocates are starting to float ideas for how to save the program. To date, the two ideas that have been floated include raising the Social Security tax or reducing the benefit — two options that are likely to be unpopular with both workers and retirees.

In effect, it would mean that workers either pay more in, or get less out – or some combination of the two.

Another proposed fix that was proposed in 2023, called the Social Security 2100 Act, would make a number of changes to the current system, such as changing the formula for COLA to use a Consumer Price Index for the Elderly (versus its current price index for wage earners).

It would also involve setting the new minimum benefit at 25% above the poverty line. Advocates say the result would be like getting a 2% raise of the average benefit.

But given that any big changes to the system are likely to be politically unpopular and difficult to pass into law, there are few practical, concrete options on the table as of 2024.

History of Early Social Security

The need to secure a financial future for ourselves and our loved ones isn’t new — or uniquely American. Across the pond, the English passed a series of “Poor Laws” around 1600 intended to ensure that the state provided for the welfare of its poorest citizens.

Americans were quick to embrace the idea that the country should take care of its people, but at first it wasn’t society at large. In 1862, for example, a post Civil War-era program offered pensions to disabled Civil War soldiers, and widows and children of the deceased.

Around the late 1800s, some private companies were starting to offer pension plans too. The first company to offer a real pension plan was the Alfred Dolge Company, which made pianos and organs. They took 1% of an employee’s salary and put it into a pension plan, and then added 6% interest per year.

In 1935, President Franklin D. Roosevelt signed into law the Social Security Act. The government then started collecting Social Security taxes two years later. Then on January 31, 1940, the first monthly retirement check of $22.54 was issued to Ida May Fuller in Ludlow, Vermont.

This Isn’t the First Social Security Shortfall

The mass retirement of the Baby Boomer generation and parallel decline in birth rate is taking the blame for Social Security’s current problems. But this isn’t the first time the fund has been in trouble.

When the program first began phasing in, for example, workers were contributing but no one was retiring yet, so the fund grew a nice little surplus. Congress, seeing those nice big numbers, were generous with increasing benefits every time they had the chance.

When the 1970s rolled around, however, and those workers reached retirement age, that upward momentum came to a screeching halt. On top of that, a flaw in the program’s COLA formula caused benefits to double-index, or increase at twice the rate of inflation rather than matching it.

It became such a mess that task forces were created, the error got its own name “The Notch Issue,” and instead of making changes to Social Security during even years, because increases and expansions were good for election campaigns, Congress made changes on odd-numbered years.

Social Security Amendments of 1983

Amendments in 1983 addressed the financing problems to the Social Security system. These changes were the last major ones to the program and were based on recommendations from a commission chaired by Alan Greenspan.

The Greenspan Commission adjusted benefits and taxes. The resulting reforms have generated surpluses and the buildup of a trust fund. However, many experts project that the retirement of the baby boomers, along with other demographic factors, will exhaust the trust.

What Can I Do About Social Security?

The SSA allows contributors to keep track of their Social Security accounts online, work with retirement and benefits estimation tools, and even apply for retirement benefits online.

Perhaps the two most important tools in the journey toward retirement are education and planning — knowing where you are, where you want to be, and what you need. Understanding the ins and outs of the ideal retirement age, whether that’s through Social Security or private retirement savings plans, and how to avoid penalties can help form a solid plan.

Aside from government benefits, one of the easiest steps for traditionally employed workers is to take full advantage of their employer’s 401(k) matching plans. These are programs in which the employer can match what you contribute to the 401(k).

If your employer doesn’t offer a 401(k) or matching plan, consider setting up an IRA or Roth IRA. Regular IRAs are tax-deductible like 401(k)s, meaning you’re not taxed until your withdrawal in retirement. Meanwhile, contributions to Roth IRAs are not tax-deductible, but you can withdraw money tax-free in retirement.

The Takeaway

Without fixes, the cash reserves of the SSA will become depleted and workers who reach full retirement age after 2033 will likely receive a reduced benefit amount. But again, that assumes that the government does not step in to make any changes – and as of 2024, there are no popular, concrete ideas for doing so, though many proposals are floating around.

It can be a scary proposition for some, but knowing that the deadline is approaching is a huge advantage for members of the workforce who have time to take measures to counter the expected shortfall by saving more and adjusting their financial plans.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

About the author

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.

SoFi Invest®

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

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

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.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q224-1911135-V1

Mar

2025

What Are Calendar Spreads and How Do They Work?

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Many options spread strategies consist of buying and selling call or put options that expire at the same time. Calendar spreads, on the other hand, involve buying and selling call or put options on the same underlying asset with different expiration dates. A calendar spread typically includes selling a near-dated option and buying a longer-dated (or longer maturity) option with the same strike price.

Rather than seeking favorable directional movement in the underlying stock, the calendar spread takes advantage of implied volatility and the way that it typically changes over time.

Like other option spread strategies, a calendar spread limits a trader’s potential losses, but it also caps their potential return. Calendar spreads are considered an advanced option trading strategy, so it’s important to have a handle on how they work and the potential risks.

Key Points

• Calendar spreads attempt to capitalize on implied volatility changes over time.

• After the near-term option expires, shifts in implied volatility can significantly impact the profitability of the remaining long-dated position.

• A rise in implied volatility benefits the long-dated option position.

• Implied volatility changes can affect the breakeven calculation.

• A calendar spread involves selling a near-term option and buying a longer-term option with the same strike price but different expiration dates.

Calendar Spreads Defined

A calendar spread, also known as a horizontal spread, is an options trading strategy that is created by simultaneously taking a long and short position on the same underlying asset and strike price, but with different expiration dates. Calendar spreads can consist of either calls or puts. Typically, the long-dated option is purchased (the long leg), and the nearer-dated option is sold (the short leg).

How Calendar Spreads Work

Calendar spreads are typically established for a net debit, meaning you pay at the outset of the trade. Generally speaking, a longer-dated option will be more expensive than a shorter-dated one if the strike prices are the same, given there is more time for the underlying asset’s value to move up or down. This reflects the effect of time decay, which is the decline in an option contract’s value as it approaches its expiration date.

Time decay is essential to how calendar spreads work. It tends to accelerate as an option’s expiration approaches, meaning the value of the near-dated short option in a calendar spread could lose value more quickly than the long option that has more time until expiration.

A calendar spread is best positioned for profitability when the stock price remains near the options’ strike price at the time of the short-term expiration date, as the short option will have declined in value or expired out of the money, while the long option retains potential gains. Calendar spreads function fairly similarly whether constructed with calls or puts. Depending on where the stock price is relative to the strike price selected at the outset of the trade, and whether calls or puts are used, a calendar spread can be neutral, slightly bearish, or slightly bullish.

Maximum Profit on Calendar Spread

A calendar spread strategy reaches its maximum profit when the stock price settles at the near-term strike price by that option’s expiration, which applies to the common approach of selling a near-term option and buying a longer-term option. This is not the end of the trade, however. The trader may also benefit if stock price rises after the near-dated option’s expiration, since they still have a long position with the later-date call option.

A rise in implied volatility after the short-term option expires can also benefit the longer-term option position. Some traders might choose to close the long option position when the near-dated option expires.

Maximum Loss on Calendar Spread

A calendar spread is typically considered a debit spread since the cost of the later-dated option is greater than the potential proceeds from the near-date option’s sale. Thus, the trader can not lose more than the premium paid.

Break-even Point

The precise break-even calculation on a calendar spread option trade cannot be determined due to the two different option delivery dates. Changing option Greeks – such as implied volatility levels and market interest rates — complicate the calculation of an exact break-even price.

Traders must estimate what the value of the long-dated option contract will be on the near-dated option’s expiry. One way to do this is by using an online option strategy profit and loss calculator to estimate a break-even price.

Calendar Spread Example

Suppose a trader holds a stock that they believe will not change much in value during the next month. The trader sells a call option expiring in one month, and buys a call at the same price that expires in two months at a slightly higher premium, which is more expensive because it has more time value than the near-dated call.

During the next month, the stock fluctuates after the trade was executed, but settles back to its strike price by the afternoon of the short-term option’s delivery date. Since time has passed and the stock has not drifted from its original value, the near-dated short call option has lost considerable time value, and may expire worthless. The later-dated call is now worth slightly more.

Calendar Spread Payoff Diagram

Calendar Spread Risks

There are several risks that traders must keep in mind when using calendar spreads.

Limited Upside

The risk and profit potential of a calendar spread depend on whether the strategy is a long or short calendar spread.

A long calendar spread, where the trader buys a longer-dated option and sells a near-term option, has a capped profit potential if the trade is closed at the expiration of the near-dated option. Option traders benefit from time decay in this case, as well as increases in implied volatility. When the short option expires or is brought to a close, there is unlimited upside with the remaining long call, assuming it is held beyond the near-term option’s expiration date.

A short calendar spread, where the trader buys a near-term option and sells a longer-dated option, has theoretically unlimited risk if the underlying stock moves significantly. Because the short position is in the longer-dated option, potential losses can exceed the initial premium collected.

If the trader uses puts, the risk dynamics remain similar, but the profit potential and exposure depend on whether the put calendar spread is long or short.

Delivery Dates

Traders must make a choice when the near-dated option is close to expiring. The trader can let it expire if the position is out of the money. If it is in-the-money, it might be worthwhile for the trader to buy and close the option or consider the potential impact on the remaining position.

Timing the Trade

Being correct about the near-term direction of the stock, as well as changes in implied volatility and time decay, can be challenging. Successfully timing the trade requires accurate predictions of both short-term price movements and also changes in volatility, which can be unpredictable and carry inherent risk.

Types of Calendar Spreads

There are several types of calendar spreads. Here’s a look at some of the most popular strategies.

Put Calendar Spread

A calendar put spread option is a strategy in which a trader sells a near-dated put and buys a longer-dated put. A trader would put this trade on when they are neutral to bearish on the price change of the underlying stock in the near-term. Once again, this type of calendar spread options strategy aims to benefit from time decay or higher implied volatility.

Call Calendar Spread

A calendar call spread involves shorting a near-term call and buying a longer-dated call at the same strike. (This is the strategy outlined in the earlier example.) The near-term outlook on the underlying stock is neutral to slightly bearish while the trader might have a longer-term bullish view.

Diagonal Calendar Spread

A diagonal calendar spread uses different strike prices for the two options positions. This strategy still uses two options — either two calls or two puts — with different expiration dates. This strategy can be either bullish or bearish depending on how the trade is constructed. The term diagonal spread simply refers to the use of both a calendar spread (horizontal) and a vertical spread.

Short Calendar Spread

Traders can use a short calendar spread with either calls or puts. It is considered a “short” calendar spread options strategy because the trader buys the near-dated option while selling the longer-dated option. This is the opposite of a long calendar spread. A short calendar spread profits from a large move in the underlying stock, but carries the risk of substantial loss if volatility increases. However, because both legs are options, a long calendar spread has a limited maximum loss, while a short call calendar spread carries theoretically unlimited risk.

The Bottom Line

Calendar spreads are useful for options traders who want to profit from changes in stock variables other than price direction. They’re an advanced strategy, however, that may not make sense for beginner investors.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

🛈 While investors are not able to sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.

FAQ

Is a calendar spread bullish or bearish?

Calendar spreads can be neutral, slightly bullish, or slightly bearish depending on the trader’s outlook. An options trader may construct the spread using puts or calls and a specific strike price that aligns with their view of market conditions.This depends on the way the spread is set up as well as the trader’s outlook. The primary objective is to benefit from changes in time decay and implied volatility changes, rather than a significant price move in the underlying asset.

Are calendar spreads good to use?

Calendar spreads can be a useful strategy for traders who are trying to benefit from volatility or time decay, rather than directional price movement. As with any options strategy, they come with risks, including the potential for limited profits and the complexity of managing both the short- and long-dated positions. Calendar spreads are generally considered an advanced strategy, so they may not be suitable for all investors.

Should you let a calendar spread expire?

Whether to let a calendar spread expire depends on the position of the trade as it nears expiration. If the short-term option expires out of the money, the trader may allow it to expire and keep the longer-term option open. However, if the short-term option expires in the money, it might be worth closing both positions or rolling the trade to adjust the strategy. The decision should align with the trader’s market outlook and risk tolerance.

Photo credit: iStock/Tatomm

SoFi Invest®

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

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

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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.

SOIN-Q125-092

Mar

2025

Where to Keep Emergency Funds

By Rebecca Lake | Budgeting & Goals, Family Finances, money | Comments Off

An emergency fund can help you cover life’s curveballs when an unexpected financial situation comes your way. You may be wondering where to keep your emergency fund until you actually need it.

You could stuff your emergency savings under the mattress or in a piggy bank, but a bank account can be a smarter way to save. The best account for emergency fund savings is one that offers you convenient access to your money, a competitive rate on deposits, and minimal fees.

Weighing some of the different banking options can help you decide where to put emergency funds.

Where to Keep Emergency Funds

Now, where to keep an emergency fund? There are different places you could keep your rainy-day money. When making a decision, it’s important to consider what works best for your lifestyle. And you’ll also want the security of knowing your money is safe, so it can be best to bank at a financial institution that is insured by the FDIC (Federal Deposit Insurance Corporation) or NCUA (National Credit Union Administration).

With that in mind, here are five possibilities you might consider when looking for the best account for emergency funds.

💡 Trying to figure out how much to save? Check out the emergency fund calculator for help.

1. Traditional Checking or Savings Accounts

You might consider keeping emergency savings in a traditional checking account or savings account at a brick-and-mortar bank. On the pro side, that could make it easier to access your money in an emergency. However, you may not get the best rate for your money. Also, checking accounts often don’t earn you any interest, and their accessibility can make it tempting to dip into the funds for something that isn’t a true emergency.

Traditional banks are not known for offering the highest annual percentage yields, or APYs, on savings accounts either. You’re also more likely to pay a monthly maintenance fee for a traditional savings account than one at an online bank.

2. High-Yield Savings

High-yield savings accounts offer above-average rates on balances. For example, you might find a savings account with an APY that’s five, 10, or even 20 times higher than the national average.

It’s more common to find high-yield savings accounts at online banks vs. traditional banks. That’s because online banks tend to have lower overhead costs so they’re able to pass on savings to their customers. You’re also less likely to pay a monthly fee for a high-yield savings account.

Of course, you won’t have branch banking access with an online savings account. You may, however, be able to access your account via an ATM card or debit card, or by transferring funds to a linked account.

3. Bonds

A bond is a type of debt instrument. When you buy a bond, you’re agreeing to let the bond issuer use your money for a set time period. In return, the issuer agrees to pay interest back to you.

Bonds can be attractive since you can earn decent interest rates on savings. However, they’re not great for accessibility since you have to wait for the bond to mature to get your money back.

You could cash out a bond early but that might mean forfeiting some of the interest you could earn. So you may want to consider bonds for money that you’d like to invest, versus money that you might need to tap into for emergencies.

4. Certificate of Deposit (CD) Accounts

A certificate of deposit or CD is a time deposit account. When you put money into a CD, the bank agrees to pay interest on your balance over a set time period. Once the CD matures, you can either withdraw your initial deposit and the interest or roll it all over to a new CD.

CDs can be a reliable way to save, since interest rates are guaranteed. However, your money is locked in for the entire maturity term. If you need to break into a CD early, your bank may charge an early withdrawal penalty. That could cost you some or all of the interest earned.

If you’re interested in using CDs for emergency savings, you might consider a CD ladder. Laddering CDs means opening multiple CDs with different maturity terms. That way, you always have a CD maturity date on the horizon. CD laddering could also help you to capitalize on rising interest rates since you can roll expiring CDs into a new account with a higher APY.

5. Money Market Accounts

Money market accounts combine features of savings accounts with checking accounts. For example, you can earn interest on balances and you might also get a debit card or paper checks that you can use to access your money.

A money market account can offer flexibility since they’re easier to access than bonds or CDs. And you might find money market accounts at online banks that offer rates comparable to what you could get with a high-yield savings account or CD. However, read the fine print: There may be minimum account opening and balance requirements as well as monthly fees to be paid.

If you’re considering a money market account for your emergency fund, consider the fees. An online money market account might be preferable for minimizing what you pay in fees while getting a competitive rate. Remember, the best account for an emergency fund will be the one that suits your specific needs.

The Takeaway

Having an emergency fund can help you sleep easier at night if you know that you’re covered should an unexpected expense crop up. If you’re looking for the best emergency fund savings account option, you can start with your current bank then compare it to other banks. Look for a combination of high APY and low (or no) fees to make the most of your money.

For instance, you might consider opening an online bank account with SoFi. With our Checking and Savings account, you can spend and save in one convenient place, plus you’ll earn a competitive APY on balances while paying no account fees, which can help your cash grow faster. One other terrific benefit: Qualifying accounts can get paycheck access up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

FAQ

What type of account is the safest for emergency funds?

A bank account at an FDIC-member bank is the safest option for holding your emergency fund. FDIC insurance protects your deposits in the rare event that your bank fails. Accounts that can be FDIC-insured include savings accounts, money market accounts, checking accounts, and CD accounts. NCUA serves a similar function insuring credit union accounts. Both offer $250,000 coverage per depositor, per account type, per insured institution.

Should I open a separate bank account for my emergency fund?

Opening a separate bank account for an emergency fund can be a good idea if you’re worried that you might be tempted to spend savings that are mingled with other funds. Having a separate savings account that’s linked to your checking account can allow for easy transfers. You’ll also continue earning interest until you need the money.

Should emergency funds be kept in cash?

Keeping an emergency fund in cash can be problematic as it increases the risk of the money being lost or stolen. You’re also not earning any interest by keeping emergency funds in savings. What’s more, certain emergency expenses might need to be paid using a check or debit card, which would still require you to deposit your cash into a bank account at some point.

About the author

Rebecca Lake

Photo credit: iStock/dobok

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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

SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

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.
SOBK0223027

Mar

2025

Which Entries on a Credit Report Will Decrease Your Credit Score?

By Rebecca Lake | Credit, relay | Comments Off

Credit scores are a measure of your overall financial health and how responsibly you manage debt. If you’re curious about which entries on a credit report will decrease your credit score, the biggest culprits are late payments, missed payments, collection accounts, foreclosure proceedings, and bankruptcy filings.

Are those the only things that can negatively impact your credit scores? Not necessarily. Can you do anything about entries on your credit that decrease your score? Perhaps, if you’re able to dispute them. Filing a credit report dispute may help to add points back to your score.

Credit Report Basics

A credit report dispute allows you to challenge information that you believe is inaccurate. If you’d like to initiate a dispute, you’ll first need to know how to read a credit report.

Credit reports include four categories of information:

• Personal information. This section of your credit report includes your name and any other names that you’re known by, your date of birth, Social Security number, addresses you’ve lived at, and employment history. Your personal information does not affect your credit scores in any way.

• Credit accounts. Information about your credit accounts is used to calculate your credit scores. Here, the most relevant details include what types of credit you’re using, when your accounts were opened, your available credit limit and current balance, the monthly minimum payment, and your payment history.

• Credit inquiries. A credit inquiry can show up on your credit reports when you apply for a loan or line of credit if it’s a “hard” credit pull. The difference between a soft credit inquiry vs. hard credit inquiry is that hard inquiries can affect your credit scores, while soft inquiries do not.

• Public records. Information that’s included in the public record about your credit accounts goes here. The types of things that can be listed include collection accounts, judgments from creditor lawsuits, and bankruptcy filings.

There are three major credit bureaus that compile credit reports: Equifax®, Experian®, and TransUnion®. Thus, you can have multiple credit reports. A tri-merge credit report compiles information from all three bureaus into a single report. As far as which credit bureau is used most, there’s no single answer as it depends on the lender.

💡 Quick Tip: Check your credit report at least once a year to ensure there are no errors that can damage your credit score.

Check your score with SoFi

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

When Can I Dispute Credit Report Information?

Under the Fair Credit Reporting Act (FCRA), you have the right to dispute inaccuracies on your credit reports with the credit bureau that’s reporting the information. You can file a dispute at any time.

Examples of errors you can dispute include:

• Credit accounts listed that don’t belong to you

• Inaccurate payment history or balances

• Current accounts that are erroneously reported as past due

• Duplicated entries for the same account

Why would someone want to dispute a credit report? In short, doing so can help your credit score if you’re able to get inaccurate information corrected or removed.

Information from your credit reports is used to calculate your credit scores. FICO® scores are the most widely used credit scoring model. Simply put, it’s a three-digit credit score ranging from 300 to 850 that reflects your credit health. The higher your score, the less risky you appear to lenders.

A middling or “fair” credit score is anything between 580 and 669. Fair credit can get you approved for loans, but you’ll need a good to excellent score to qualify for the lowest interest rates.

Does Filing a Dispute Hurt Your Credit?

Disputing credit reporting errors won’t hurt your credit. Depending on the outcome of the dispute, it could even help your score. During the dispute process, the credit bureau is legally required to investigate your claim to determine if your reason for the dispute is valid.

Keep in mind that disputing credit report errors isn’t necessarily an instant fix for bad credit. If you have multiple negative items on your report, then getting just one of them corrected or removed may do little to improve your score. Disputing information could hurt your credit if a correction negatively affects your credit file.

It’s also important to know that disputing credit report information doesn’t guarantee its removal or correction. If there’s negative information on your credit reports but it’s accurate, you can’t dispute it. The upside is that most negative information falls off your reports after seven years, though it can take up to 10 years for a Chapter 7 bankruptcy filing to disappear.

💡 Quick Tip: An easy way to build your credit score? Pay your bills on time. Setting up autopay can help you keep your account in good standing.

Possible Outcomes of Disputes

When you file a credit report dispute, the credit bureau has 30 days to investigate it. That involves reaching out to the business that reported the information initially to confirm whether it’s correct. The business must review your account history and report back to the credit bureau that’s handling the dispute.

There are several ways your dispute might be resolved.

• Scenario #1: Your dispute is deemed to be frivolous by the credit bureau. The investigation will stop and you’ll be notified as to why. You may be given an opportunity to provide additional information to support your claim.

• Scenario #2: The business that reported the information acknowledges an error. It must send written notice to all three credit bureaus to have the information corrected. The credit bureau must send a correction notice to anyone who received your credit report in the previous six months. Notices must also be sent to anyone who ran a credit check for employment for you in the past two years.

• Scenario #3: The business verifies that the information is accurate. No change is made to your credit report.

When your dispute is upheld, the credit bureau must correct or remove the inaccurate information. If a dispute is not resolved in your favor, you can ask the credit bureau to include a statement of the claim in your credit file. You can also ask the credit bureau to send a copy of the dispute statement to anyone who’s received your credit report but you might pay a fee for that.

Note that you can also add or update personal information to your credit file. For instance, you might choose to add a recent address or a job to your employment history. Changes to personal information won’t affect your credit scores.

Disputes Related to Accounts, Inquiries, and Bankruptcy

Disputes involving credit accounts, inquiries for credit, and bankruptcy cases can have the same outcomes as described above. Depending on what the investigation finds, your account may be:

• Updated to reflect accurate information

• Deleted entirely from your credit report

• Unchanged, if the information is deemed correct

The outcome can determine what changes you might expect, if any, to your credit score. Having negative information corrected or removed can help your score, though the extent of the improvement depends on whether you have other negative items on your report.

If you’re interested in how to find out your credit score free, there are a few ways to do it. First, you might be able to get your credit score for free from one of your credit card companies. Many issuers offer free FICO scores as a cardmember benefit.

Signing up for free credit score monitoring is another option. In terms of what qualifies as credit monitoring, it generally refers to any service that automatically tracks changes to your credit reports that affect your credit scores. For example, that might include opening or closing credit accounts, late or missed payments, or paid-off accounts.

How Long Will Information Stay on My Credit Report?

Generally, negative information can stay on your credit report for seven years. That includes things like:

• Late payments

• Missed payments

• Charge-offs

• Collection accounts

• Creditor judgments

• Foreclosure proceedings

As mentioned, a Chapter 7 bankruptcy filing can stay on your credit report for up to 10 years. A Chapter 13 bankruptcy can linger for up to seven years. As long as information on your report is accurate, it can’t be removed prematurely, even if that information is negative. Once the time is up for reporting of a negative item, it will fall off naturally; you shouldn’t have to request its removal.

Credit inquiries can stick around for 24 months, while positive information about your credit accounts can remain indefinitely. If you close any credit accounts in good standing, they can stay on your credit reports for up to 10 years.

What Are Some Ways to Avoid a Credit Score Drop?

Practicing good financial habits is the easiest way to avoid a credit score drop. You can do that by:

• Paying credit accounts on time

• Keeping credit card balances low relative to your credit limits

• Limiting how often you apply for new credit

• Using a mix of credit types, including loans and credit cards

• Keeping older accounts open

Reviewing your credit reports regularly for errors or inaccuracies is another way to prevent credit score hits. You can dispute those errors to have them removed or corrected, which can help your score recover if it’s dropped temporarily.

How to Dispute Accurate Information in Your Credit Report

Accurate information on a credit report usually isn’t up for dispute, unless the same account is being reported multiple times. In that case, you dispute the “extra” entries on your report to have them removed.

If there’s negative but accurate information on your credit report, then you might try writing a goodwill letter to the creditor asking them to remove it. However, they have no obligation to honor your request. If the account is past due and they’ve been trying to collect what’s owed, they may also ask you to pay before they delete the item.

Credit repair companies charge you to remove negative items from your report. However, the tactics they use are ones that are already available to you, including disputing negative information, goodwill letters, and paying for deletion. It’s important to weigh whether paying a fee to repair credit is worth it, especially if the company’s promises seem too good to be true.

The Takeaway

Keeping up with credit scores is important if you plan to borrow money. The better your score, the easier it is to get approved for loans and qualify for the lowest rates.

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.

SoFi helps you get your money right.

FAQ

What factor causes your credit score to decrease the most?

Negative payment history has the biggest impact on credit scoring under the FICO model. Late payments, missed payments, charge-offs, collections, foreclosure proceedings, and bankruptcies can all hurt your credit score more so than things like new credit inquiries or closing credit accounts.

What are negative entries on a credit report?

A negative entry on a credit report is anything that’s harmful to your credit score. That can include late payments, missed payments, collection accounts, and judgments. A high credit utilization ratio can also negatively affect your credit scores.

What are 3 ways to decrease your credit score?

Three things that can hurt your credit score are paying late, not paying at all, and running up high balances on credit cards relative to your credit limits. Letting accounts slip into collections, being sued by creditors for debt, and filing bankruptcy can also cost you major credit score points.

About the author

Rebecca Lake

Photo credit: iStock/Daniel de la Hoz

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 .

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

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.

SORL0523009

Mar

2025

Inherited IRA: Distribution Rules for Beneficiaries

Inherited IRA Distribution Rules Explained

By Ashley Kilroy | invest, Investing, Preparing for Retirement | Comments Off

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.

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

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.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with SoFi.

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 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

SoFi Invest®

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

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

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

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

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

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

SOIN-Q125-080

When Will Social Security Run Out?

How Social Security Works

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

Understanding Social Security Tax

At What Age Are You Eligible for Social Security?

Social Security Trust Funds

The Risk of Social Security Running Out

Myth 1: There Won’t be any Money to Pay Benefits

Reality: Social Security Surplus Funds May be Exhausted

Myth 2: People Who Aren’t Eligible for Social Security can Receive It

Reality: Documentation is Required to Obtain Benefits

Myth 3: The Current System Can’t Support an Aging Population

Reality: Social Security Can Adapt

Problems With Social Security

How to Avoid Social Security Running Out

History of Early Social Security

This Isn’t the First Social Security Shortfall

Social Security Amendments of 1983

What Can I Do About Social Security?

The Takeaway

What Are Calendar Spreads and How Do They Work?

Calendar Spreads Defined

How Calendar Spreads Work

Maximum Profit on Calendar Spread

Maximum Loss on Calendar Spread

Break-even Point

Calendar Spread Example

Calendar Spread Payoff Diagram

Calendar Spread Risks

Limited Upside

Delivery Dates

Timing the Trade

Types of Calendar Spreads

Put Calendar Spread

Call Calendar Spread

Diagonal Calendar Spread

Short Calendar Spread

The Bottom Line

FAQ

Is a calendar spread bullish or bearish?

Are calendar spreads good to use?

Should you let a calendar spread expire?

Where to Keep Emergency Funds

Where to Keep Emergency Funds

1. Traditional Checking or Savings Accounts

2. High-Yield Savings

Earn up to 3.80% APY with a high-yield savings account from SoFi.

3. Bonds

4. Certificate of Deposit (CD) Accounts

5. Money Market Accounts

The Takeaway

FAQ

What type of account is the safest for emergency funds?

Should I open a separate bank account for my emergency fund?

Should emergency funds be kept in cash?

Which Entries on a Credit Report Will Decrease Your Credit Score?

Credit Report Basics

Check your score with SoFi

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

When Can I Dispute Credit Report Information?

Does Filing a Dispute Hurt Your Credit?

Possible Outcomes of Disputes

Disputes Related to Accounts, Inquiries, and Bankruptcy

How Long Will Information Stay on My Credit Report?

What Are Some Ways to Avoid a Credit Score Drop?

How to Dispute Accurate Information in Your Credit Report

The Takeaway

FAQ

What factor causes your credit score to decrease the most?

What are negative entries on a credit report?

What are 3 ways to decrease your credit score?

Inherited IRA Distribution Rules Explained

What Is an Inherited IRA?

Basic Rules About Withdrawals

Exceptions for Eligible Designated Beneficiaries

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

What Are the RMD Rules for Inherited IRAs?

RMD Rules for Non-Spouses

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.¹

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.¹

Student Loan
Refinancing

Personal
Loans

Online
Investments