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Oct

2024

How Long Do Closed Credit Accounts Stay on Your Credit Report?

By Caroline Banton | Credit, Money & Life, relay | Comments Off

You might think that if you close a loan or credit card account it will no longer affect your credit report, but they can actually stay on your credit report for up to 10 years. During this time period, these accounts can help or hurt your credit score, depending on a number of factors.

Here’s what you should know about closing loan and credit card accounts from your credit report.

Key Points

• Closed credit accounts can stay on your credit report for up to 10 years, impacting your score.

• On-time payments on closed accounts positively affect your credit history.

• Late payments on closed accounts can negatively impact your credit history for seven to 10 years.

• Closing accounts can affect your credit utilization rate and credit mix, influencing your credit score.

• Removing closed accounts with poor payment history or fraudulent activity can build your credit profile.

How Closed Accounts Affect Your Credit

Closed credit accounts and loans can have varying effects on your credit, some positive and some negative, due to the factors that make up your credit rating. Here’s a closer look at three of those that are significant in this situation: your credit history, your credit utilization rate, and your credit mix.

Your Credit History

A closed account on which you made on-time payments will help your credit score by building your credit history. The effect will be less than if it were an open account, but it would be a positive factor nonetheless, since it shows that you can manage credit responsibly.
However, if you made late payments on an account that is now closed, the negative impact may linger in your credit history for seven years and up to 10 years if you file for bankruptcy.

Longevity is a factor on your credit report. Credit scoring systems reward borrowers with a longer history of managing debt and repayment. That means that if you close an account and seven years pass, you’ll lose any benefit of having had that account. It won’t make a significant change, but it is another factor to be aware of.

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Your Credit Utilization Rate

Part of your credit rating is based on how much debt or credit you already have. Creditors look at your credit utilization ratio, which is how much credit you have available to you versus how much you actually use. The best case scenario is to not use more than 10% of your accessible credit; otherwise, no more than 30% is a good move.

Two examples:

• Say you have a $10,000 credit limit on your credit card, you might want to limit your balance to $1,000. That’s 10%.

• Otherwise, keeping your balance to no more than $3,000 would be 30%, the upper end of what’s considered a good credit utilization ratio.

If you close a loan or a credit card account, that might reduce the amount of credit available to you, which will increase your utilization rate. If you open a credit card or take out a loan, that will increase the amount of credit available to you, thereby decreasing your utilization rate.

Your Credit Mix

Credit scoring systems, such as the FICO® Score and VantageScore® look at the types of loans you have and how you manage them. These systems reward a mix of loan types, such as installment loans (auto loans and mortgages), and revolving accounts such as credit cards. Eliminating a credit card account or other type of loan (such as when it is closed and eventually drops off your report) could limit your credit mix, and that could negatively impact your credit score. Worth noting though: Credit mix counts for 10% of your score vs. 35% for your payment history (meaning, how successfully you make payments on time).

Why Do Closed Accounts Stay on Your Credit Report?

Both closed and open accounts can contribute to your credit rating as they stay on your credit report. That’s because the credit agencies can gain a fuller picture of your risk as a borrower the more information they have.

Monitoring and understanding your credit report (perhaps with a credit score monitoring app; your bank may offer this) is an important part of your financial wellness.

When to Remove a Closed Account from Your Credit Report

If possible, remove a closed account from your credit report if it has a poor payment history. Also, remove any accounts that are found to be fraudulent. If an account shows that you made regular, on-time payments, don’t remove it because it will be helping your score.

Recommended: Average Salary by State

How to Remove a Closed Account from Your Credit Report

A few factors affect your credit score; one of which is your credit history. As noted above, your credit history shows the loans and credit cards you have obtained in the past seven to 10 years, along with your repayment patterns. Even closed accounts are part of that narrative for the stated period of time.

That said, there may be a way to remove a closed account from your credit report, which you might want to do if it is having a negative effect. Here are some options.

1. File a Dispute if There Is an Error on Your Credit Report

It might be that you notice a fraudulent account when you check your credit report. If that is the case, you can remove the record by submitting a dispute in writing with each of the three credit bureaus (Equifax®, Experian®, and TransUnion®). You must include supporting documents. The bureaus will investigate your complaint and update your credit score if there is fraudulent data.

2. Contact the Creditor and Pursue a Goodwill Deletion

Another way to remove a closed account from your credit report is to directly contact the creditor that’s involved and ask them to remove the account from your credit report. (This is sometimes known as a goodwill letter or goodwill request.) The creditor will have to contact the credit bureau(s) directly to do so. You will be more successful if you have a positive credit history and relationship with the creditor.

3. Wait It Out

In time, a closed account will no longer be reflected on your credit report, but it might take seven to 10 years. The good news is that the accounts that stay the longest are usually ones that you closed in good standing, and these will positively influence your credit score.

What Does “Account Closed” Mean on a Credit Report?

“Account closed” on your credit report indicates an account that is no longer active. There can be several reasons for an account being closed.

• Perhaps it was an installment loan that you paid off.

• You might have opened a credit card account and then decided to close it (maybe you weren’t using it much).

• The creditor closed it, which could be positive (you paid off a loan) or negative (you weren’t paying your bills in a timely manner).

These are typical scenarios that lead to seeing “account closed” on your credit report.

How Long Will a Paid-off Account Take to Show up on Your Report?

Lenders usually update the credit report agencies with closed account information at the end of a billing cycle. Thus, it could take one or two months before a paid-off account is reflected on your credit report.

How Long Does a Closed Account Stay on My Credit Report?

As noted above, how long closed accounts stay on your credit report can vary.

• Accounts closed in good standing (paid on time and in full) can remain on your credit report for up to 10 years.

• Accounts closed due to nonpayment (these include collection accounts, some bankruptcies, and debt settlement) remain on your credit reports for seven years from the first missed payment or from being turned over to collections. The exception is Chapter 7 bankruptcy, which usually stays on your credit report for 10 years.

Practice Good Credit Habits Going Forward

Here’s advice that can help you manage existing credit card and loan accounts well.

• First, it’s always wise to take control of your budget. Whether you do that with the 50/30/20 budget rule or a financial tracking app, keeping on top of your income, your spending, and your saving can be a money-smart move.

• Check your credit score regularly to make sure there is no fraudulent activity. You might aim for an annual review.

• Extend your credit history as much as you can with accounts that are and have been in good standing. This means it’s probably in your best interest to occasionally use a credit card account and keep it in good shape vs. closing it because you don’t use it often. This can reduce your available credit and possibly lower your debt utilization ratio.

One good idea can be to use a credit card for predictable expenses, such as streaming services, and set up automatic payments. That way, you will be paying a set amount each month and building a positive credit history.

These moves can help you keep your financial profile in good shape.

The Takeaway

Closed credit accounts will stay with you for a long time, seven to 10 years usually. Keep accounts that you have owned for a long time open and in good standing whenever possible. If you have fraudulent accounts on your credit history or ones that were not managed well, you might take steps to have them removed and possibly build your credit profile.
Keeping tabs on your credit score and your budget can be easy with the right tools, like those SoFi offers.

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FAQ

Can I get closed accounts removed from my credit report?

You can remove a closed account from your credit report if you suspect it is fraudulent by filing a dispute with the three credit bureaus. You can also contact a creditor directly and ask them to remove a closed account. However, they are under no obligation to comply with this kind of request for a “goodwill” deletion. Alternatively, you can wait for seven to 10 years, after which closed accounts will fall off your credit history.

What is the 609 loophole?

The 609 loophole is a tactic that some people think will remove bad debt history from their credit reports. A section of the Fair Credit Reporting Act states that you can write a letter to gain documentation on what you may believe is an incorrect entry in your credit history. The 609 letter theory is that if a credit bureau cannot produce a piece of information, such as the original signed copy of your credit application, they have to remove the disputed item because it’s unverifiable. However, these steps are not the same as a dispute. Also, if you have legitimate debt, even without this documentation, the debt may remain. In other words, this process is unlikely to provide a shortcut to building your credit.

How long before a debt is uncollectible?

At which point a debt can no longer be collectible varies based on the type of debt and the state you live in. It is often between three and six years, but it could be as long as 20 years. After the statute of limitations that applies, a debt collector can no longer sue you for repayment, though some might still try to collect.

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SORL-Q324-024

Oct

2024

SEP IRA Contribution Limits for 2024

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

A SEP IRA, or Simplified Employee Pension IRA, is a tax-advantaged retirement plan for people who are self-employed or run a small business. SEP IRA contribution limits determine how much you can contribute to the account each year.

The IRS sets contribution limits for SEP IRAs and adjusts them annually for inflation. SEP IRA contribution rules permit employers to make contributions to their own or their employees’ SEP accounts; employees do not contribute to a SEP.

Key Points

• SEP IRAs offer a tax-advantaged way to save for retirement, beneficial for self-employed and small business owners.

• It’s possible to contribute as much as $69,000 to a SEP IRA in 2024, an increase from the previous year.

• For 2024, employers can contribute up to the lesser of 25% of an employee’s compensation or $69,000 to a SEP IRA.

• Contributions to SEP IRAs are tax-deductible and must be reported on IRS Form 5498.

• Since contributions to SEP IRAs are made with pre-tax dollars, qualified withdrawals are subject to ordinary income tax.

What Is a SEP IRA?

A SEP IRA is a tax-advantaged retirement account that allows employers to make contributions on behalf of employees. Businesses of any size can establish a SEP IRA, including self-employed individuals who have no employees.

SEP IRAs are subject to the same tax treatment as traditional IRAs. Specifically, that means:

• Contributions to a SEP IRA are tax-deductible for employers or self-employed individuals

• Qualified withdrawals are subject to ordinary income tax since SEP IRAs are funded with pre-tax dollars

• Early withdrawals before age 59 ½ may be subject to taxes and penalties

• Required minimum distributions (RMDs) are required at age 73 (assuming you turn 72 after Dec. 31, 2022).

The SECURE 2.0 Act permits employers to offer employees a Roth SEP IRA option, though they’re not required to. It’s also possible to convert a traditional SEP IRA to a Roth IRA, to get tax-free retirement withdrawals. However, the account owner would have to pay tax on earnings at the time of the conversion.

SEP IRA Contribution Limits for 2024

Once you open an IRA, it’s important to be aware that the IRS determines the maximum SEP IRA contribution limits each year. For 2024, it’s possible to contribute as much as $69,000, up from the maximum limit of $66,000 in 2023.

Unlike traditional or Roth IRAs, catch-up contributions are not allowed with SEP IRAs.

Here are the details on how the 2024 SEP IRA contribution limits work.

Maximum Contribution Amounts

The SEP IRA max contribution by employers for 2024 is the lesser of the following:

• 25% of an employee’s compensation

• $69,0003

This limit applies to employers who make contributions on behalf of employees. As noted above, employees cannot make elective salary deferrals to a SEP IRA the way they can with a traditional or Roth 401(k) plan.

If you’re self-employed your SEP IRA contribution limits for 2024 are the lesser of:

• 25% of your net self-employment earnings (see how to calculate net self-employment earnings below)

• $69,0004

Self-employed individuals may want to compare a solo 401(k) vs SEP IRA to decide which one offers the most benefits in terms of contribution levels and tax advantages.

Calculation Methods and Factors

Whether you’re an employer or a self-employed individual dictates how you calculate the amount you can contribute to a SEP IRA.

According to SEP IRA rules, employer contributions are based on each employee’s compensation. The IRS limits the amount of compensation employers can use to calculate the SEP IRA max contribution for the year.

For 2024, employers can base their calculations on the first $345,000 of compensation. As with the SEP IRA contribution limit, the IRS adjusts the compensation threshold annually.

In addition, contribution rates are required to be the same for all employees and the owner of the company. So if you’re a business owner who is contributing a certain amount to your own account, you must contribute funds at that same rate to your employees.

If you’re self-employed, you’ll need to calculate your net earnings from self-employment less the deductions for:

• One-half of self-employment tax

AND

• Contributions to your own SEP IRA

Net earnings from self-employment is the difference between your business income and business expenses. For 2024, the self-employment tax rate is 15.3% of net earnings, which consists of 12.4% for Social Security and 2.9% for Medicare.

Strategies for Maximizing SEP IRA Contributions

Maximizing SEP IRA contributions comes down to understanding the annual contribution limit and the deadline for making contributions.

The IRS releases updated SEP IRA contribution limits as soon as they’re finalized to allow employers and self-employed individuals sufficient time to plan. You’ll have until the annual income tax filing deadline each year to make contributions to a SEP IRA on behalf of your eligible employees or yourself, if you’re self-employed.

Once you open an investment account like a SEP IRA, you can make monthly contributions or contribute a lump sum to meet the max SEP IRA limit for the year. If you’re self-employed, you may find it helpful to contribute something monthly and then make one larger lump sum contribution just ahead of the tax filing deadline once you’ve had a chance to calculate your net earnings from self-employment.

This strategy could mean that you miss out on some earnings from compounding returns since you’re putting in less money throughout the year. However, it may prevent you from making excess contributions to your SEP IRA, which can result in a penalty.

Recommended: What is a Self-Directed IRA?

Potential Changes and Updates for Future Years

SEP IRA contribution limits don’t stay the same each year. The amount you contribute for 2024 will likely increase for 2025. Staying on top of changes to the contribution limits can ensure that you don’t miss out on opportunities to maximize your SEP IRA.

Cost-of-Living Adjustments (COLAs)

Internal Revenue Code (IRC) Section 415 requires annual cost of living increases for retirement plans and IRAs. Cost-of-living adjustments are meant to help your savings rate keep pace with the inflation rate.

These COLA rules apply to:

• SEP IRAs

• SIMPLE IRAs

• Traditional and Roth IRAs

• 401(k) plans

• 403(b)plans

• 457 plans

• Profit-sharing plans

The IRC also applies COLAs to Social Security benefits to ensure that people who rely on them can maintain a similar level of purchasing power even as consumer prices rise.

Monitoring IRS Announcements

The IRS typically announces COLA limits and adjustments in November or December of the preceding year. For example, the IRS released the Internal Revenue Bulletin detailing SEP IRA contribution limits for 2024 and other COLA adjustments on November 20, 2023.

These bulletins are readily available on the IRS website. You can review the latest and past bulletins on the IRS bulletins page.

Compliance and Tax Implications

SEP IRAs are fairly easy to set up and maintain, but there are compliance rules you will need to follow. As an employer, you’re not required to make contributions to a SEP IRA for eligible employees every year, and if you are self-employed, you are not required to make yearly contributions to your own SEP. However, if you make contributions on behalf of one eligible employee, you have to make contributions on behalf of all eligible employees.

And remember, the contribution percentage you use to calculate the SEP IRA maximum for each employee, and for yourself as the business owner, must be the same.

Reporting SEP IRA Contributions

SEP IRA contributions must be reported on IRS Form 5498. If you’re using tax filing software to complete your return you should be prompted to enter your SEP IRA contributions when reporting your income. The software program will record contributions and calculate your deduction for you.

There’s one more thing to note. Contributions must be reported for the year in which they’re made to the account, regardless of which tax year the contributions are for.

Excess Contribution Penalties

The IRS treats excess SEP IRA contributions as gross income for the employee. If you make excess contributions, the employee would need to withdraw them, plus any related earnings, before the federal tax filing deadline.

If they fail to do so, the IRS can impose a 6% excise tax on excess SEP IRA contributions left in the employee’s account. The employer can also be hit with a 10% excise tax on excess nondeductible contributions.

The Takeaway

For small business owners and the self-employed, SEP IRAs can be a good way to save and invest for retirement. Just be aware that SEP IRA rules are more complicated than the rules for other types of IRAs when it comes to contributions and deductions. If you’re contributing to one of these plans for your employees, or for yourself as a self-employed business owner, it’s important to know how much you can contribute, what each year’s contribution limits are, and when contributions are due.

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FAQ

What is the maximum SEP IRA contribution for 2024?

The SEP IRA contribution limit for 2024 tops out at $69,000. That’s the maximum amount you can contribute to a SEP account on behalf of an employee or to your own SEP IRA if you’re self-employed.

Can I contribute to both a SEP IRA and a 401(k)?

It’s possible to contribute to both a SEP IRA and a 401(k) if you’re employed by multiple businesses. The plans must be administered by separate companies, or you must work for a company that has a 401(k) and then contribute to a SEP IRA for yourself as a self-employed business owner.

Are SEP IRA contributions tax-deductible for employers?

Employers can deduct SEP IRA contributions made on behalf of employees. Contributions must be within the annual contribution limit to be deductible. Excess SEP IRA contributions are not eligible for a deduction.

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SOIN-Q324-036

Oct

2024

What Is a Required Minimum Distribution (RMD) for IRAs

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

Individual retirement accounts (IRAs) are retirement savings accounts that offer certain tax-advantages. Some types of IRAs, including traditional and inherited Roth IRAs, are subject to required minimum distribution (RMD) rules.

What is an RMD on an IRA? In simple terms, it’s a withdrawal you make from an RMD every year once you reach a certain age. RMDs are a way for the IRS to ensure that retirement savers meet their tax obligations. Failing to take distributions when you’re supposed to could result in a tax penalty, so it’s important to know when you must take an RMD on an IRA.

Key Points

• Required minimum distributions (RMDs) are mandatory withdrawals from IRAs that account owners must start taking at age 73, as per IRS rules.

• RMDs apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, and other defined contribution plans.

• The RMD amount account holders need to withdraw is calculated using the IRS Uniform Lifetime or life expectancy tables.

• Failing to take RMDs can result in a 25% excise tax, reduced to 10% if corrected within two years.

• RMDs are taxed as ordinary income, and qualified charitable distributions (QCDs) can be used to reduce tax liability.

Required Minimum Distribution (RMD) Definition

A required minimum distribution is an amount you need to withdraw from an IRA account each year once you turn 73. (In 2023 the SECURE 2.0 Act increased the age that individuals had to start taking RMDs to age 73 for those who reach 72 in 2023 or later.) You can take out more than the minimum amount with an RMD, but you must withdraw at least the minimum to avoid an IRS tax penalty.

The minimum amount you need to withdraw when taking an RMD is based on specific IRS calculations (see more about that below).

Special Considerations for RMDs

RMD rules apply to multiple types of retirement accounts. You’re subject to RMDs if you have any of the following:

• Traditional IRA

• SEP IRA

• SIMPLE IRA

• 401(k) plan

• 403(b) plan

• 457(b) plan

• Profit-sharing plan

• Other defined contribution plans

• Inherited IRAs

You must calculate RMDs for each account separately.

Failing to take RMD distributions from IRAs or other eligible investment accounts on time can be costly. The SECURE 2.0 Act allows the IRS to assess a 25% excise tax on the amount you failed to withdraw. That penalty might drop to 10% if the RMD is properly corrected within two years.

Why Do You Have to Take an RMD?

The IRS imposes RMD rules on IRAs and other retirement accounts to prevent savers from deferring taxes on earnings indefinitely. Here’s how it works.

When you contribute to a traditional IRA, SEP IRA, SIMPLE IRA, 401(k), or a simple retirement plan, you fund your account with pre-tax dollars (meaning you haven’t yet paid tax on that money). In exchange, you may be able to deduct some or all of the contributions you make.

Your account grows tax-deferred, and when you make qualified withdrawals in retirement, you pay ordinary income tax on earnings. If you were to leave the money in your IRA untouched, the IRS couldn’t collect tax on earnings, hence the need for RMDs.

Roth IRAs generally don’t have RMDs. When you make contributions to a Roth account you use after-tax dollars — in other words, you’ve already paid taxes on that money. So you don’t have to pay taxes again when you make qualified withdrawals in retirement. However, if you inherit a Roth IRA, you will be required to take RMDs.

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RMDs for Roth and Traditional IRAs

When you open an IRA, you will typically choose between a Roth IRA or traditional IRA. There are differences between them when it comes to RMDs. Traditional IRAs are always subject to RMD rules. If you contribute to a traditional IRA, whether you max out the annual contribution limit or not, you can expect to take RMDs from your account later. RMD rules also apply when you inherit a traditional IRA.

Are there RMDs on Roth IRA accounts? No, if you’re making original contributions to a Roth IRA that you own. But you will need to take RMDs if you inherit a Roth IRA from someone else.

The IRS determines when you must take distributions from an inherited Roth IRA. The timing depends on whether the person you inherited a Roth IRA from was your spouse and whether they died before 2020 or in 2020 or later.

If you inherit an IRA from a spouse who passed away before 2020, you may:

• Keep the account as your own, taking RMDs based on your life expectancy, or follow the 5-year rule, meaning you generally fully withdraw the account balance by the end of the 5th year following the year of death of the account holder

• Roll over the account to your own IRA

If you inherit an IRA from a spouse who passed away in 2020 or later, you may:

• Keep the account as your own, taking RMDs based on your life expectancy, delay beginning distributions until the spouse would have turned 72, or follow the 10-year rule, generally fully withdrawing the account balance by the end of the 10th year following the year of death of the account owner

• Roll over the account to your own IRA

If you inherit an IRA from someone who is not your spouse and who passed away before 2020, you may:

• Take distributions based on your own life expectancy beginning the end of the year following the year of death

• Follow the 5-year rule

If you inherited an IRA from someone who is not your spouse and who passed away in 2020 or later and you are a designated beneficiary, you may:

• Follow the 10-year rule

IRA withdrawal rules for inherited IRAs can be tricky so if you know that someone has named you as their IRA beneficiary, you may find it helpful to discuss potential tax implications with a financial advisor.

How To Calculate RMDs on an IRA

To calculate RMDs on an IRA, you divide the balance of your account on December 31 of the prior year by the appropriate life expectancy factor set by the IRS. The IRS publishes life expectancy tables for RMDs in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). You choose the life expectancy table that applies to your situation.

IRA Required Minimum Distribution Table Example

The IRS uses the Uniform Lifetime Table to determine RMDs for people who are:

• Unmarried account owners

• Married IRA owners whose spouses aren’t more than 10 years younger

• Married IRA owners whose spouses are not the sole beneficiaries of their account

Here’s how RMD distributions break down.

Age	Distribution Period (Years)	Age	Distribution Period (Years)
72	27.4	97	7.8
73	26.5	98	7.3
74	25.5	99	6.8
75	24.6	100	6.4
76	23.7	101	6.0
77	22.9	102	5.6
78	22.0	103	5.2
79	21.1	104	4.9
80	20.2	105	4.6
81	19.4	106	4.3
82	18.5	107	4.1
83	17.7	108	3.9
84	16.8	109	3.7
85	16.0	110	3.5
86	15.2	111	3.4
87	14.4	112	3.3
88	13.7	113	3.1
89	12.9	114	3.0
90	12.2	115	2.9
91	11.5	116	2.8
92	10.8	117	2.7
93	10.1	118	2.5
94	9.5	119	2.3
95	8.9	120 and over	2.0
96	8.4

Source: IRS Uniform Lifetime Table

And here’s an example of how you might use this table to calculate RMDs on an IRA.

Assume that you’re 75 years old and have $1 million in your IRA as of last December 31. You find your distribution period on the chart, which is 24.6, then divide your IRA balance by that number.

$1 million/24.6 = $40,650 RMD

You’ll need to recalculate your RMDs each year, based on the new balance in your IRA and your life expectancy factor. You can use an online calculator to figure out RMD on an IRA annually.

Withdrawing Required Minimum Distribution From an IRA

There are two deadlines to know when making RMDs from an IRA: when distributions must begin and when you must complete distributions for the year. The SECURE 2.0 Act introduced some changes to the timing of RMD withdrawals from an IRA.

When Do RMDs Start?

Beginning in 2023, the minimum age at which you must begin taking RMDs rose to 73 (that’s the same age you must begin taking RMDs for 401(k)s, in case you are wondering). The deadline for the very first RMD you’re required to make when you turn 73, is April 1 of the following year. So, if you turned 73 in 2025, then your first RMD would be due no later than April 1, 2026.

Once you make your first RMD, all other RMDs after that are due by December 31 each year. So, using the example above, if you make your first RMD on April 1, 2026, then you’d need to make your second RMD by December 31 of that same year to avoid a tax penalty. Just keep in mind that taking two RMDs in one year could increase your tax burden for the year.

Qualified Charitable Distributions (QCDs)

Qualified charitable distributions (QCDs) are amounts you contribute to an eligible charity from your IRA. QCDs are tax-free and count toward your annual RMD amount, and you can contribute up to $100,000 per year. Using your IRA to make QCDs can lower the amount of tax you have to pay while supporting a worthy cause.

For a distribution to count as a QCD, it must be made directly from your IRA to an eligible charity. You can’t withdraw funds from your IRA to your bank account and then use the money to write a check to your favorite charity.

Note that QCDs are not tax-deductible on Schedule A, the way that other charitable donations are.

How RMDs Are Taxed

RMDs are taxed as ordinary income, assuming that all of the contributions you made were tax-deductible. If you have a traditional IRA, your RMDs would be taxed according to whichever bracket you fall into at the time the withdrawals are made.

With an inherited Roth IRA, withdrawals of original contributions are tax-free. Most withdrawals of earnings from an inherited Roth IRA are also tax-free unless the account is less than five years old at the time of the distribution.

The Takeaway

The IRS requires you to take RMDs on certain types of IRAs, including traditional IRAs and inherited Roth IRAs. Knowing at what age you’re required to take money from an IRA and your deadline for withdrawing it can help you plan ahead and avoid a potentially steep tax penalty.

In general, coming up with a financial plan for your future can help you work toward your retirement goals. You can consider different options for saving and investing, including IRAs, 401(k)s, or other types of savings or investment vehicles, to help determine the best fit for your money.

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).

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

FAQ

What happens if you don’t take RMDs from an IRA?

Failing to take an RMD from an IRA on time can result in a tax penalty. The current penalty is generally a 25% excise tax, assessed against the amount you were required to withdraw.

Do you have to take your IRA RMD if you are still working?

You do have to take RMDs from an IRA even if you’re still working. It’s worth noting that the IRS does typically allow you to defer RMDs from a 401(k) while you’re working — however, that rule doesn’t extend to IRAs.

Are you required to use IRA RMD money for specific purposes?

You can use RMDs money in any way that you like. Some common uses for IRA RMDs include medical expenses, home repairs, and day-to-day costs. You can also use IRA RMDs to make qualified charitable donations (QCD), which could minimize some of the tax you might owe. QCDs must be made directly from your IRA to the charity.

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

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SOIN-Q324-035

Oct

2024

IBAN vs SWIFT Code: Differences Explained

By Timothy Moore | money, Terminology | Comments Off

In international banking, transactions can involve IBAN codes, which indicate a specific foreign bank account number, and SWIFT codes, which identify a particular financial institution. Depending on the countries and banks involved, sometimes only one of these codes is needed to make an international transfer, and sometimes both. Knowing the difference between these codes — and how and when each is used — can be valuable when transferring funds globally.

Key Points

• IBAN codes identify specific bank accounts in international transactions, while SWIFT codes identify specific financial institutions.

• IBANs are up to 34 characters long and include a country code, check digits, a bank identifier, and a basic account number.

• SWIFT codes are 8 to 11 characters long and include a bank code, country code, location code, and sometimes a branch code.

• IBANs are used mainly in Europe and other regions, while SWIFT codes have a broader global reach.

• Both codes may be required for international transfers, depending on the countries and banks involved.

What Is an IBAN?

An IBAN is an International Bank Account Number. This number, up to 34 digits, pinpoints a person’s individual bank account in participating countries.

Because countries operate with different currencies, regulations, and financial institutions, IBANs help standardize cross-border transactions. IBANs can play an important role in getting funds transferred into the correct checking account or savings account.

Each unique alphanumeric IBAN code contains:

• A two-letter country code

• Two “check digits” for error detection

• Up to 30 alphanumeric characters that signify an individual’s bank account (a bank identifier and a basic bank account number)

Roughly 80 countries currently use IBAN numbers when conducting money transfers. The largest collection of these countries is in Europe, but many North African, South American, Caribbean, and Middle Eastern countries participate as well.

IBANs are not used in America. Instead an ABA routing number and a bank account number identify checking and savings accounts. But if you’re wiring money internationally to a country that uses IBANs, you’ll need to know that number.

(Worth noting: Canada, Australia, and New Zealand also don’t use IBANs but instead use their own systems for identifying accounts.)

Recommended: What Is an Intermediary Bank?

Understanding SWIFT Codes

SWIFT stands for Society of Worldwide Interbank Financial Telecommunication, a messaging network through which financial institutions can communicate securely across borders. This is a popular payment network for international wire transfers, but it’s not the only network.

A SWIFT code is a globally accepted standard BIC (Bank Identifier Number) for SWIFT transfers. Essentially, a SWIFT code refers to a specific bank or financial institution during international transfers. In that way, SWIFT codes serve a similar purpose internationally as routing numbers do domestically in the United States.

SWIFT codes are much shorter than IBANs, with between eight and 11 characters. Each contains:

• The first four digits are a bank code

• The next two are a country code

• The next two signify the bank’s main office location

• If applicable, the final three digits refer to a specific branch code (these are used by large banks with multiple branches in various countries and regions)

Unlike the case with IBANs, U.S. bank customers do typically have SWIFT codes affiliated with their accounts. (Some smaller banks and credit unions may not use SWIFT codes, however.) Your bank’s code will play a role if you are sending money overseas or if you are receiving funds from abroad.

It’s also important to know that there are several countries that are currently not permitted to participate in the SWIFT payment system, such as North Korea, Belarus, and Russia.

Key Differences Between IBAN and SWIFT

The major differences between IBAN vs. SWIFT codes come down to where each is used, what information each contains, and what kinds of transactions each is used in. Here are important points to know:

Geographic Coverage

IBANs are most popular for identifying bank account numbers in the European Union and nearby countries (such as Israel and Turkey), but other countries in South America and the Caribbean have adopted these codes as well. The United States, again, does not use IBANs; instead, bank account numbers and routing numbers are used domestically.

The SWIFT system has a greater global reach. It is the most popular network for identifying banks when managing international transfers in many countries in North America, the European Union, Africa, Central and South America, as well as China and India, and more. That said, not every nation uses SWIFT codes, either because they choose not to participate or are prohibited (as noted above) from doing so.

Information Contained

SWIFT vs. IBAN codes indicate two separate pieces of banking information, as mentioned above:

• SWIFT codes, eight to 11 characters in length, can identify a specific bank or financial institution during international money transfers.

• IBAN codes, up to 34 characters, can identify specific bank accounts during cross-border money transfers.

Usage in Transactions

Which codes you’ll need to make an international transfer will be determined by the code systems used by the countries and financial institutions sending and receiving the money. Sometimes, you’ll only need one of these codes, but often you’ll need a SWIFT and an IBAN code for an international bank wire. (They are separate identifiers, so it’s not a matter of, say, converting IBAN to SWIFT. Each conveys important financial information.)

That said, here are some scenarios you might encounter:

• If you’re sending money to someone in a country that doesn’t use IBAN, you’ll have to use another way to identify the bank and their checking account.

• If someone in a foreign country wants to transfer funds to you, they will not have an IBAN code associated with your account and will need to use your bank account and routing number and your bank’s SWIFT code, if available.

• If you are trying to move money internationally to a country where you can’t use a SWIFT code, you’ll need to use another network to send money electronically. You might explore whether fintech options are available.

Combining IBAN and SWIFT

As mentioned, for many international transfers, you’ll need to know both the IBAN and SWIFT code involved. It really depends on which country you’re wiring money to. In some instances, you may only need one of the numbers. However, in this case, you may need to satisfy other requirements a country has established for transferring funds, as they might use other identifiers.

The Takeaway

SWIFT vs. IBAN codes are used to standardize international transfers and help ensure secure payments. SWIFT information identifies a particular bank in a country, such as in the U.S. or elsewhere, while IBAN characters point to a specific bank account in countries using the IBAN system. When sending funds from the U.S. to someone in a foreign country, you will likely need both of these codes to complete the transfer. U.S. banks typically have SWIFT codes that are used when they are receiving cross-border funds to be directed to a client’s account.

While SoFi doesn’t currently do international transfers, we do provide competitive interest rates and a host of tools to help you manage your money better.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

Can a bank have multiple SWIFT codes?

It’s possible for a bank to have multiple SWIFT codes. Bigger banks with multiple branches across the globe may use three extra digits at the end of their code to identify a specific branch.

Is IBAN used in the United States?

The United States does not use IBAN codes. Instead, the U.S. uses a bank account number and routing number to identify financial institutions and the specific accounts within them. However, if you live in the U.S. and are wiring money internationally, you may need to know the recipient’s IBAN code, depending on what country they live in.

How do I find my IBAN or SWIFT code?

If you have a bank account in the U.S., you will not have an IBAN code affiliated with it. If you have a bank account outside the U.S. in a country that uses IBANs, you can typically find an IBAN code on your bank statement or on the bank’s website. If you are wiring money to someone who lives in a country using the IBAN system, you can ask for their IBAN code when discussing the details of the wire transfer.

You should also be able to find a bank’s SWIFT code on its website or on a bank statement (if you are a client). If you’re unable to locate it, you might do a quick online search or call the bank’s customer service number.

What happens if I use the wrong code for a transfer?

If you use the wrong code for a wire transfer and it cannot be completed, the money may be returned to your account. In some cases, you may be charged a fee for this. However, there is the slight possibility that the transfer could be completed and the money sent to the wrong account. That is why, if you know you used the wrong code, it’s important to contact your financial ASAP and see if you can request a cancellation or reversal of the transfer.

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As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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SOBNK-Q324-075

Oct

2024

What Is a Wire Transfer? A Complete Guide to Fast Money Transfers

By Timothy Moore | Family Finances, money, Terminology | Comments Off

Wire transfers can be a convenient and safe way to send and receive money electronically, both domestically and internationally. While wire transfers serve a number of purposes, they can be especially good if you need a secure way to send cash to someone overseas or if you need to transfer a large sum, such as the down payment on a house.

Key Points

• Wire transfers are electronic money transfers between bank accounts, particularly useful for large sums and international transactions.

• Domestic wire transfers are typically completed within one business day, while international wire transfers may take up to five days.

• Wire transfers generally differ from ACH transfers, P2P payments, and checks in terms of speed, fees, and convenience.

• Wire transfers are considered secure but can be more costly, with fees ranging from $0 to $50.

• To send a wire transfer, you’ll need the recipient’s bank details and sender’s identification, and once initiated, these transfers cannot be canceled once initiated.

Wire Transfers Explained

A wire transfer, as the name suggests, is a method of transferring money from one bank account to another electronically. Wire transfers allow you to move large sums of money both within the United States and internationally. Wire transfers are convenient, but they are not instantaneous:

• Domestic wire transfers are typically completed within one business day.

• International wire transfers usually take a few business days; in some cases, up to five days.

Wire transfers allow funds to flow between individuals and/or businesses, and they may be facilitated by banks or a nonbank money transfer service, such as Western Union or Wise.

It’s worth noting, however, that wire transfers can be a more expensive way to move money out of or into a bank account. Depending on whether they are domestic or international and the bank or service you use, the charge could be anywhere from $0 to $50. Another point to know: Wire transfers typically can’t be canceled, so it’s vital to double-check all details carefully when making one.

How Wire Transfers Differ From Other Payment Methods

Wire transfers aren’t the only way to send money. Other options include:

• ACH transfers, which electronically move funds from one bank to another

• Peer-to-peer (P2P) payment services, such as PayPal, Venmo, and Cash App

• Traditional cash or check payments

• Money orders and cashier’s checks

Here are some considerations regarding how wire transfers compare to the alternatives above:

• Speed: Wire transfers are generally faster than writing a check, but P2P payments may be speedier, particularly if you pay a fee for instant transfers.

• Convenience: While many wire transfers can be done online, you may be required to visit a bank branch or retail location in person in some cases. ACH transfers and P2P payments, however, can be done from a smartphone or computer, wherever you may be.

• Fees: Senders often pay fees for wire transfers, while recipients may or may not need to pay a fee. Money orders and cashier’s checks also typically come with fees for the sender, and P2P payment apps usually charge for instant transfers.

• Amounts: Wire transfers typically allow you to send the largest sum of money (upwards of $100,000), which makes them popular in real estate transactions. P2P payment apps usually have daily and weekly limits, and money orders tend to max out around $5,000.

How Do Wire Transfers Work?

The process for completing a wire transfer is usually pretty straightforward:

• The sender visits a financial institution or a wire transfer service location or initiates the transaction online.

• They provide information about themself and the recipient.

• To initiate or complete the transfer, the sender may also need to pay a fee.

• The bank or service provider will communicate with the recipient’s institution to verify the transaction. The funds will then be deposited into the recipient’s account, where the recipient can access the money.

• In some cases, the recipient may need to pay a fee as well.

Domestic vs. International Wire Transfers

Domestic wire transfers refer to electronic funds transfers between two financial institutions in the United States. These generally take a single business day to complete and are more affordable, with the sender often paying between $15 and $30 and the recipient paying between $0 and $15.

International wire transfers are more complex, given different countries’ regulations and currencies. Expect the fees to be higher for international wire transfers, often between $35 and $50 for the sender and $0 and $30 for the recipient. In addition, prepare for these to take a few days (even up to five) to process.

Information Needed for a Wire Transfer

To complete an outgoing wire transfer (that is, to send money to someone else via wire), you’ll need to supply some information, including:

• The recipient’s full name and contact information (such as their address and phone number)

• The recipient’s bank account and routing numbers (or, for international transfers, SWIFT/BIC and IBAN numbers).

As the sender, you’ll also need to provide:

• Your name and contact information (often along with a government-issued ID or driver’s license)

• The funds for the transfer (either physical money or your bank account information)

• Your name and phone number

• Any fees to cover the wire transfer service.

Advantages and Disadvantages of Wire Transfers

Wire transfers have both pros and cons to consider vs. other payment methods. The table below breaks down some of the benefits and drawbacks of using a wire transfer:

Pros	Cons
You can wire large sums of money.	Wire transfers come with fees for the sender and sometimes the recipient.
Domestic wire transfers are fast, usually within one day.	International wire transfers take more time, typically taking a few days.
Wire transfers allow you to send money internationally.	You can’t reverse a wire transfer once it’s initiated.
Wire transfers are generally considered safe.	Fraudsters have developed a number of bank scams that utilize wire transfers.

Types of Wire Transfer Services

There are two main types of wire transfer services: bank and nonbank.

Bank Wire Transfers

A traditional bank wire transfer requires that both the sender and the recipient have a bank account. The sender will need to know the recipient’s bank account information to transfer money from their own bank account to the recipient. You typically either visit a local bank branch to initiate the wire transfer or use your bank’s online platform. Some banks and credit unions may even waive fees (or offer lower fees) to members.

After initiating the wire transfer, the sender’s and the recipient’s financial institutions will communicate through an electronic system, such as SWIFT, to securely complete the transfer.

Nonbank Wire Transfer Services

You don’t have to work directly with a bank to wire money. You can also use a nonbank transfer service, such as Western Union. To complete the transfer, you may visit a service location in person, fill out a form, and physically provide the money to the wire transfer service provider. Another option that’s often available is to complete the process online, drawing funds from your bank account. The funds can then be made available for pickup in person or be sent to the recipient’s checking account or to a mobile wallet on their phone.

SWIFT and IBAN in International Transfers

International wire transfers require a little more information than domestic transfers. In addition to providing your and the recipient’s basic information (such as name and account details), you’ll typically need to know the recipient’s SWIFT and IBAN codes:

• The SWIFT (Society for Worldwide Interbank Financial Telecommunication) code identifies the recipient’s bank. In this way, it acts like a routing number, but they are not the same. You may also see this referred to as a BIC (Bank Identifier Number).

• The IBAN (International Bank Account Number) code identifies the recipient’s account at their bank.

The U.S. and Canada do not use IBANs. For instance, someone wiring money from another country to the U.S. would instead need to know the recipient’s bank account number and routing number. Australia and New Zealand also use different codes.

Wire Transfer Fees and Costs

Wire transfer fees vary depending on the financial institution or nonbank wire transfer service you use, but they typically range anywhere between $0 and $50. Senders almost always must pay a wire transfer fee, though some banks and credit unions don’t charge fees to send, at least domestically. Recipients sometimes have to pay a fee as well, particularly for international wire transfers.

Typical wire transfer fees are as follows:

• Outgoing domestic wire transfers: $0 to $30

• Incoming domestic wire transfers: $0 to $15

• Outgoing international wire transfers: $35 to $50

• Incoming international wire transfers: $0 to $30

The Takeaway

Wire transfers can be an effective way to electronically transfer money between individuals and/or businesses, both domestically and internationally. While you’ll often pay a fee to initiate a wire transfer (and sometimes to receive one), this payment method has several advantages, such as its speed and the ability to send large sums of money.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

How long does a wire transfer take?

Domestic wire transfers typically process within 24 hours; if you time it right, the transfer may even complete in the same day. International wire transfers take a little longer, usually between one and five business days, depending on the country to which you’re wiring money.

Are wire transfers safe?

Wire transfers are typically considered to be a safe way to send money, as long as you know the recipient and have their correct information. However, many fraudsters use wire transfers in a number of common bank scams. To avoid this risk, never wire money to a person you don’t know, and educate yourself on common fraud tactics.

Can I cancel a wire transfer?

You cannot cancel a wire transfer once you have initiated it. Thus, you should always make sure all the information is correct before initiating a wire transfer.

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SOBNK-Q324-074

How Long Do Closed Credit Accounts Stay on Your Credit Report?

How Closed Accounts Affect Your Credit

Your Credit History

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Your Credit Utilization Rate

Your Credit Mix

Why Do Closed Accounts Stay on Your Credit Report?

When to Remove a Closed Account from Your Credit Report

How to Remove a Closed Account from Your Credit Report

1. File a Dispute if There Is an Error on Your Credit Report

2. Contact the Creditor and Pursue a Goodwill Deletion

3. Wait It Out

What Does “Account Closed” Mean on a Credit Report?

How Long Will a Paid-off Account Take to Show up on Your Report?

How Long Does a Closed Account Stay on My Credit Report?

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What is the 609 loophole?

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SEP IRA Contribution Limits for 2024

What Is a SEP IRA?

SEP IRA Contribution Limits for 2024

Maximum Contribution Amounts

Calculation Methods and Factors

Strategies for Maximizing SEP IRA Contributions

Potential Changes and Updates for Future Years

Cost-of-Living Adjustments (COLAs)

Monitoring IRS Announcements

Compliance and Tax Implications

Reporting SEP IRA Contributions

Excess Contribution Penalties

The Takeaway

FAQ

What is the maximum SEP IRA contribution for 2024?

Can I contribute to both a SEP IRA and a 401(k)?

Are SEP IRA contributions tax-deductible for employers?

What Is a Required Minimum Distribution (RMD) for IRAs

Required Minimum Distribution (RMD) Definition

Special Considerations for RMDs

Why Do You Have to Take an RMD?

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Qualified Charitable Distributions (QCDs)

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The Takeaway

FAQ

What happens if you don’t take RMDs from an IRA?

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Are you required to use IRA RMD money for specific purposes?

IBAN vs SWIFT Code: Differences Explained

What Is an IBAN?

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Understanding SWIFT Codes

Key Differences Between IBAN and SWIFT

Geographic Coverage

Information Contained

Usage in Transactions

Combining IBAN and SWIFT

The Takeaway

FAQ

Can a bank have multiple SWIFT codes?

Is IBAN used in the United States?

How do I find my IBAN or SWIFT code?

What happens if I use the wrong code for a transfer?

What Is a Wire Transfer? A Complete Guide to Fast Money Transfers

Wire Transfers Explained

How Wire Transfers Differ From Other Payment Methods

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How Do Wire Transfers Work?

Domestic vs. International Wire Transfers

Information Needed for a Wire Transfer

Advantages and Disadvantages of Wire Transfers

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