SEP Rules and Limits to Know
A SEP IRA is a type of traditional IRA that allows self-employed individuals and small business owners to save up to $57,000 annually for retirement.
Read moreA SEP IRA is a type of traditional IRA that allows self-employed individuals and small business owners to save up to $57,000 annually for retirement.
Read moreSaving is an important part of your financial health and building wealth, but it can be confusing to understand all the different vehicles out there. For instance, if you want to stash cash away for a good long while, should you open a Roth IRA or a savings account?
A Roth Individual Retirement Account (IRA) offers a tax-advantaged way to invest money for retirement. Brokerages and banks can offer Roth IRAs for investors who want to set aside money that they don’t anticipate spending for the near future.
Savings accounts can also be used to hold money you plan to spend at a later date. The main difference between a Roth IRA and savings account, however, lies in what they’re intended to be used for.
If you’re debating whether to keep your money in a Roth IRA or savings account, it’s helpful to understand how they work, their similarities and differences, and the pros and cons of each option.
Key Points
• Roth IRAs are designed for retirement savings, offering tax-free growth and tax-free withdrawals in retirement.
• Savings accounts are ideal for short-term goals and emergency funds, offering more accessibility and flexibility.
• Roth IRAs can potentially yield higher returns through investments, while savings accounts provide safety and liquidity.
• Both account types can be opened with low initial deposits and are insured if held at banks.
• Choosing between them depends on financial goals, with Roth IRAs generally being better for long-term growth.
A savings account is a type of deposit account that can be opened at a bank, credit union, or another financial institution. Savings accounts are designed to help you separate money you plan to spend later from money you plan to spend now.
Here’s how a savings account works:
• You open the account and make an initial deposit.
• Money in your account can earn interest over time, at a rate set by the bank.
• When you need to spend the money in your savings account, you can withdraw it.
Previously, savers were limited to making six withdrawals from a savings account per month under Federal Reserve rules. In 2020, the Federal Reserve lifted that restriction, though banks can still impose monthly withdrawal limits on savings accounts. Exceeding the allowed number of withdrawals per month could trigger a fee or could lead to the account being converted to a checking account.
Banks can offer more than one kind of savings account. The range of savings accounts available can depend on whether you’re dealing with a traditional bank, an online bank, or a credit union.
Typically, these accounts will be insured up to $250,000 by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).
Generally, the types of savings accounts you can open include:
• Traditional savings. Traditional savings accounts, also called regular, basic, or standard savings accounts, allow you to deposit money and earn interest. Rates for traditional savings may be on the low side, and you might pay a monthly fee for these accounts at brick-and-mortar banks.
• High-yield savings. The main benefits of high-yield savings accounts include above-average interest rates and low or no monthly fees. For example, online banks may offer high-yield savings accounts with rates that are many times higher than the national average savings rate, with no monthly fee.
• Money market savings. Money market savings accounts, or money market accounts, combine features of both savings accounts and checking accounts. For example, you can earn interest on deposits but have access to your money via paper checks or a debit card.
• Specialty savings. Some types of savings accounts are created with a specific purpose in mind. For example, Christmas Club accounts are designed to help you save money for the holidays. A Health Savings Account (HSA) is a tax-advantaged specialty savings account that’s meant to be used for health care expenses.
You could also add certificates of deposit (CDs) to this list, though a CD works differently than a savings account. CDs are time deposit accounts, meaning that when you put money in the account, you agree to leave it there for a set term. If you take the funds out before then, you will likely be charged a fee.
Once the CD matures, you can withdraw your initial deposit and the interest earned. For that reason, CDs offer less flexibility than other types of savings accounts.
Recommended: Savings Account Calculator
Quick Money Tip: If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.
Savings accounts can be used to save for a variety of financial goals, including retirement. You might be wondering whether it makes a difference if you use, say, a high yield savings account vs. Roth IRA or other retirement account to save, as long as you’re setting money aside consistently.
While savings accounts can offer convenience and earn interest, they’re not necessarily ideal when saving for retirement if your primary goal. Here are some of the advantages and disadvantages of using a savings account to plan for retirement.
Pros | Cons |
---|---|
Savings accounts are easy to open and typically don’t require a large initial deposit. | A savings account does not offer any tax benefits or incentives for use as a retirement account. |
Banks and credit unions can pay interest on savings account deposits, allowing you to grow your money over time. | Interest rates for savings accounts can be low and may not outpace inflation. |
You can withdraw money as needed and don’t have to reach a specific age in order to use your savings. | Banks can impose fees or even convert your savings account to checking if you’re making frequent withdrawals. |
Savings accounts are safe and secure; deposits are protected up to $250,000 when held at an FDIC member bank. | If you’re putting all of your retirement funds into the same savings account, it’s possible that your balance might exceed the insured limit. |
Recommended: Different Ways to Earn More Interest on Your Money
No account or overdraft fees. No minimum balance.
Up to 3.80% APY on savings balances.
Up to 2-day-early paycheck.
Up to $3M of additional
FDIC insurance.
A Roth IRA is a type of individual retirement account that works somewhat differently than a traditional IRA. Traditional IRAs are funded with pre-tax dollars and allow for tax-deductible contributions when doing taxes. Once you turn 72, you’re required to begin taking money from this kind of account.
The way a Roth IRA works is that you set aside money using after-tax dollars, up to the annual contribution limit. That means you can’t deduct contributions to a Roth IRA. However, you won’t pay taxes on account earnings and will be able to withdraw funds tax-free in retirement.
You can leave money in your Roth IRA until you need it, which may allow it even more time to grow. Unlike traditional IRAs, there are no required minimum distributions for Roth IRAs. If you don’t use all of the money in your Roth IRA in retirement, you can pass it on to anyone you’d like to name as your beneficiary.
The IRS allows you to make a full contribution to a Roth IRA if you’re within certain income thresholds, based on your tax filing status. The full contribution limit for 2024 and 2025 is $7,000, or $8,000 for those 50 and up. You can make a full contribution if your tax status is:
• Married filing jointly or a qualified widow(er) with a modified adjusted gross income of up to $230,000 in 2024 (up to $236,000 in 2025)
• Single, head of household, or married filing separately and did not live with your spouse during the year with a modified adjusted gross income of up to $146,000 in 2024 (up to $150,000 in 2025)
Contributions are reduced once you exceed these income thresholds. They eventually phase out completely for higher earners.
Roth IRAs are specifically designed to be used for retirement saving. Again, that’s the chief difference between a Roth IRA and savings account. That doesn’t mean, however, that a Roth IRA is necessarily right for everyone. For example, you may need to weigh whether a Roth IRA or traditional IRA is better, based on your income and tax situation.
Here are some of the advantages and disadvantages associated with choosing a Roth IRA for retirement savings.
Pros | Cons |
---|---|
Money in a Roth IRA can be invested in stocks, mutual funds, and other securities, potentially allowing your money to grow faster. | Investing money in the market is riskier than stashing it in a savings account; there’s no guarantee that you won’t lose money in a Roth IRA. |
You may be able to open a Roth IRA with as little as $500 or $1,000, depending on the brokerage or bank you choose. | Brokerages can charge various fees for Roth IRAs. Individual investments may also carry fees of their own. |
Earnings grow tax-free and you can withdraw original contributions at any time, without a penalty. | You can’t withdraw earnings tax-free until age 59 ½ and the account is at least 5 years old. |
You can save money in a Roth IRA in addition to contributing money to a 401(k) plan at work. | Not everyone is eligible to open a Roth IRA, and there are annual contribution limits. |
Roth IRAs and savings accounts do have some things in common. For example:
• Both can be used to save money for the long-term and both can earn interest. So you could use either one or both as part of a retirement savings strategy.
• You can open a Roth IRA or savings account at a bank and initial deposits for either one may be relatively low. Some banks also offer Roth IRA CDs, which are CD accounts that follow Roth IRA tax rules.
• Savings accounts and Roth IRAs held at banks are also FDIC-insured. The FDIC insures certain types of retirement accounts, including Roth IRAs, when those accounts are self-directed and the investment decisions are made by the account owner, not a plan administrator.
• It’s possible to open a savings account for yourself or for a child. Somewhat similarly, you can also open a Roth IRA for a child if they have income of their own but haven’t turned 18 yet.
When comparing the benefits of Roth IRAs vs. savings accounts, however, Roth accounts have an edge for retirement planning. Whether it makes sense to choose something like a high-yield savings account vs. a Roth IRA can depend on what you want to set money aside for.
To understand how savings accounts and Roth IRAs compare, it helps to look at some of the key differences between them.
Roth IRA | Savings Account | |
---|---|---|
Purpose | A Roth IRA is designed to save for retirement. | Savings accounts can fund virtually any short- or long-term goal. |
Who Can Open | Taxpayers who are within certain income thresholds can open a Roth IRA. | Adults with valid proof of ID can open a savings account, regardless of income or tax status. |
Interest | Money in a Roth IRA earns compounding interest based on the value of underlying investments. | Savings accounts earn interest at a rate set by the bank. |
Tax Benefits | Roth IRAs grow tax-free and allow for tax-free qualified distributions, with no required minimum distributions. | Savings accounts don’t offer any tax benefits; interest earned is considered taxable income. |
Contribution Limits | Roth IRAs have an annual contribution limit. For 2024 and 2025, the limit is $7,000 ($8,000 if you’re 50 or older.) | There are no contribution limits, though FDIC protection only applies to the first $250,000 per depositor, per account ownership type, per financial institution. |
Withdrawals | Generally, you can’t withdraw earnings without paying a penalty before age 59 ½ (though there are some exceptions). Original contributions can be withdrawn at any time without a penalty. | Banks can limit the number of withdrawals you’re allowed to make from a savings account each month and impose a fee for exceeding that limit. |
Risk | Investing money in a Roth IRA can be risky; you may lose money. | Your deposits are protected (up to the insured limit). |
If you’re unsure whether to open a Roth IRA vs. a high-yield savings account, it’s helpful to consider your goals and what you want to do with your money.
You might decide to open a Roth IRA if you:
• Specifically want to save for retirement and potentially earn a higher rate of return
• Would like to be able to withdraw money tax-free to buy a home or pay higher education expenses (the IRS allows you to avoid a tax penalty for these distributions)
• Want to supplement the money you’re contributing to a 401(k) at work
• Expect to be in a higher tax bracket at retirement and want to be able to withdraw savings tax-free
• Don’t want to be required to make minimum distributions at age 72
On the other hand, you might open a savings account if you:
• Have a short- or medium-term goal you’re saving for
• Want a safe place to keep your money
• Are satisfied with earning a lower rate of return on savings
• Need to be able to keep some of your money liquid and accessible
• Aren’t concerned with getting any type of tax break for your savings
The good news is that you don’t have to choose between a high-interest savings account vs. a Roth IRA. You can open one of each type of account to save for both retirement and other financial goals.
Opening a retirement account can be a smart move if you’d like to save money for your later years while enjoying some tax breaks. A Roth IRA could be a good fit if you’re eligible to open one and you’d like to be able to make tax-free withdrawals once you retire.
Having a savings account is also a good idea if you’re building an emergency fund, saving for a vacation, or have another money goal that is a few months or years away. Your deposits will earn interest and you’ll be able to easily access your funds (penalty-free) when you need them.
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.
A savings account can be better for setting aside cash you know you’ll need in the next few months or years. A Roth IRA, on the other hand, is better suited for saving for retirement, since it has greater growth potential (though returns are not guaranteed), while also providing tax benefits.
While you could use a Roth IRA as a savings account, you generally can’t access earnings on the account until age 59 ½ without paying a penalty. Another downside of using a Roth IRA as a savings account is that funds are typically invested for long-term growth. If you withdraw money in the short-term, you could lose money due to fluctuations in the value of your assets.
One of the main disadvantages to a Roth IRA is that contributions are made with after-tax money, which means you don’t get a tax deduction in the years you contribute. Another drawback is that not everyone can take advantage of a Roth IRA, since there are income limits on contributions.
Also keep in mind that the maximum annual contribution to Roth IRA is relatively low compared with a 401(k). As a result, you will likely need other accounts to adequately save for retirement.
You can link a savings account to a Roth IRA to transfer funds. If you’d like to move money from savings to your Roth account, you’d just log into your brokerage account and schedule the transfer. Keep in mind that Roth IRAs do have annual limits on how much you can contribute.
The FDIC insures Roth IRAs held at banks when those accounts are self-directed, meaning the owner, not a plan administrator, directs how the funds are invested. The same FDIC insurance limits that apply to savings accounts apply to these Roth IRAs.
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SoFi members with direct deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. 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 (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer 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 Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with 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 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 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 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.
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.
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U.S. government-backed securities like Treasury bills (T-bills) provide a way to invest with minimal risk. These debt instruments are one of several different types of Treasury securities including Treasury notes (T-notes) and Treasury bonds (T-bonds).
Unlike other treasuries, however, T-bills don’t pay interest. Rather, investors buy T-bills at a discount to par (the face value).
Investors looking for a low-risk investment with a short time horizon and a modest return may find T-bills an attractive investment. T-bills have minimal default risk and maturities of a year or less. But Treasury bill rates are typically lower than those of some other investments.
Key Points
• T-bills are short-term investments that offer a guaranteed rate of return.
• Investors don’t receive coupon, or interest, payments. The return is the discount rate.
• T-bills have a near-zero risk of default.
• Investors can buy T-bills directly from TreasuryDirect.gov, or on the secondary market using a brokerage account.
Treasury bills are debt instruments issued by the U.S. government. They are short-term securities and are issued with maturity dates ranging from 4 weeks to one year. It may be possible to buy T-bills on the secondary market with maturities as short as a few days.
Essentially, when an individual buys a T-bill, they are lending money to the U.S. government. In general, T-bills are considered very low risk, since they are backed by the full faith and credit of the U.S. government, which has never defaulted on its debts.
T-bills are sold at a discount to their par, or face value. They are essentially zero-coupon bonds. They don’t pay interest, unlike other types of Treasuries (and coupon bonds); rather the difference between the discount price and the face value is like an interest payment.
While all securities have a face value, also known as the par value, typically investors purchase Treasury bills at a discount to par. Then, when the T-bill matures, investors receive the full face value amount. So, if they purchased a treasury bill for less than it was worth, they would receive a greater amount when it matures.
Example
Suppose an investor purchases a 52-week T-bill for $4,500 with a par value of $5,000, a 5% discount. Since the government promises to repay the full value of the T-bill when it expires, the investors will receive $5,000 at maturity, and realize a profit or yield of $500.
In the example above, the discount rate of the T-bill is 5% — and that is also the yield. But examples aside, the actual 52-week Treasury bill rate, as of Feb. 1, 2024, is 4.46%.
Recommended: How to Buy Treasury Bills, Bonds, and Notes
Understanding the maturity date of a T-bill is important. This is the length of time you’ll hold the bill before you redeem it for the full face value. Maturity dates affect the discount rate, with longer maturities generally offering a higher discount/return, but interest rates will influence the discount.
The government issues T-bills at regular auctions, in four-, eight-, 13-, 17-, 26-, and 52-week terms, in increments ranging from $100 to $10 million. The minimum T-bill purchase from TreasuryDirect.gov is $100.
Some investors may create ladders (similar to bond ladders), which allow them to roll their T-bills at maturity into more T-bills. Although T-bill rates are fixed, and because their maturities are so short, they don’t have much sensitivity to interest rate fluctuations.
💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.
You can purchase T-bills at regular government auctions on TreasuryDirect, or on the secondary market, from your brokerage account.
Noncompetitive bids: With a noncompetitive bill, the investor accepts the discount prices that were established at the Treasuries auction, which are an average of the bids submitted.
Since the investor will receive the full value of the T-bill when the term expires, some investors often favor this simple technique of investing in T-bills.
Competitive bid: With a competitive bid, all investors propose the discount rate they are prepared to pay for a given T-bill. The lowest discount rate offers are selected first. If investors don’t propose enough low bids to complete the entire order, the auction will move onto the next lowest bid and so on until the entire order is filled.
Another option is to purchase or sell T-bills on the secondary market, using a standard brokerage account.
Investors can also trade exchange-traded funds (ETFs) or mutual funds that may include T-bills that were released in the past.
As noted above, although T-bills are debt instruments and an investor’s loan is repaid “with interest,” T-Bills don’t have a coupon payment the way some bonds do. Rather, investors buy T-bills at a discount, and the difference between the lower purchase price and the higher face value is effectively the interest payment when the T-bill matures.
When a T-bill matures, investors can redeem it for cash at Treasury.gov.
T-bill purchases and redemptions are now fully digital. Paper T-bills are no longer available.
Gains from all Treasuries, including T-bills, are taxed at the federal level; i.e. they are taxed as income on your federal income tax return.
Treasury gains are exempt from state and local income tax.
The U.S. government offers a number of debt instruments, including Treasury Bills, Notes, and Bonds. The difference between them is their maturity dates, which can also affect interest rates and discount rates.
Investors can purchase Treasury notes (or T-notes) in quantities of $1,000 and with terms ranging from two to 10 years. Treasury notes pay interest, known as coupon payments, bi-annually.
Out of all Treasury securities, Treasury bonds have the most extended maturity terms: up to 30 years. Like T-notes, Treasury bonds pay interest every six months. And when the bond matures the entire value of the bond is repaid.
Recommended: How to Buy Bonds: A Guide for Beginners
Like any other investments, it’s important to understand how T-bills work, the pros and cons, and how they can fit into your portfolio.
Although any T-bill you buy offers a guaranteed yield at maturity, because T-bills are short-term debt the discount rates (and therefore the yield) can fluctuate depending on a number of factors, including market conditions, interest rates, and inflation.
Generally, the longer the maturity date of the bill, the higher the returns. But if interest rates are predicted to rise over time, that could make existing T-bills less desirable, which could affect their price on the secondary market. It’s possible, then, that an investor could sell a T-bill for lower than what they paid for it.
It’s also important to consider the role of the Federal Reserve Bank, which sets the federal funds target rate, for overnight lending between banks. When the fed funds rate is lower, banks have more money to lend, but when it’s higher there’s less money circulating.
Thus the fed funds rate has an impact on the cost of lending across the board, which impacts inflation, purchasing power — and T-bill rates and prices as well. As described, T-bill rates are fixed, so as interest rates rise, the price of T-bills drops because they become less desirable.
By the same token, when the Fed lowers interest rates that tends to favor T-bills. Investors buy up the higher-yield bills, driving up prices on the secondary market.
Bear in mind that because the maturity terms of T-bills are relatively short — they’re issued with six terms (four, six, 13, 17, 26 and 52 weeks) — it’s possible to redeem the T-bills you buy relatively quickly.
T-bill rates vary according to their maturity, so that will influence which term will work for you.
💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.
• They are a low-risk investment. Since they are backed in the full faith of the U.S. government, there is a slim to none chance of default.
• They have a low barrier to entry. In other words, investors who don’t have a lot of money to invest can invest a small amount of money while earning a return, starting at $100.
• They can help diversify a portfolio. Diversifying a portfolio helps investors minimize risk exposure by spreading funds across various investment opportunities of varying risks and potential returns.
• Low yield. T-bills provide a lower yield compared to other higher-yield bonds or investments such as stocks. So, for investors looking for higher yields, Treasury bills might not be the way to go.
• Inflation risk exposure. T-bills are exposed to risks such as inflation. If the inflation rate is 4% and a T-bill has a discount rate of 2%, for example, it wouldn’t make sense to invest in T-bills—the inflation exceeds the return an investor would receive, and they would lose money on the investment.
Investing all of one’s money into one asset class leaves an investor exposed to a higher rate of risk of loss. To mitigate risk, investors may turn to diversification as an investing strategy.
With diversification, investors place their money in an assortment of investments — from stocks and bonds to real estate and alternative investments — rather than placing all of their money in one investment. With more sophisticated diversification, investors can diversify within each asset class and sector to truly ensure all investments are spread out.
For example, to reduce the risk of economic uncertainty that tends to impact stocks, investors may choose to invest in the U.S. Treasury securities, such as mutual funds that carry T-bills, to offset these stocks’ potentially negative performance. Since the U.S. Treasuries tend to perform well in such environments, they may help minimize an investor’s loss from stocks not performing.
Treasury bills are one investment opportunity in which an investor is basically lending money to the government for the short term. While the return on T-bills may be lower than the typical return on other investments, the risk is also much lower, as the US government backs these bills.
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While revolving credit provides borrowers with flexibility, too much revolving debt can be crippling. Even with falling interest rates, the most vulnerable credit card holders can use some help.
Let’s look at ways of dealing with mounting revolving debt. But first, here’s a primer on what revolving debt is and how it differs from installment debt.
Key Points
• Revolving credit allows borrowing up to a limit but can lead to high interest and debt if not managed well.
• Installment debt involves fixed monthly payments until the loan is paid off, offering predictable payments and potential refinancing options.
• Managing revolving debt involves strategies like budgeting, debt consolidation, and balance transfers to lower interest rates and monthly payments.
• Credit utilization ratio and payment history significantly impact credit scores, with late payments damaging scores for up to seven years.
• Debt settlement and credit counseling are options for managing debt, but they come with potential drawbacks like damaged credit scores and high costs.
There are two main categories of debt: revolving and installment. Revolving credit lets you borrow money up to an approved limit, pay it back, and borrow again as needed. The two most common revolving accounts are credit cards and a home equity line of credit (HELOC).
HELOCs are offered to qualified homeowners who have sufficient equity in their homes. Most have a draw period of 10 years, followed by a repayment period. A less common type of revolving credit is a personal line of credit, usually obtained by an existing customer of a lending institution.
Then there are credit cards, which became part of the American fabric in the 1950s, starting with the cardboard Diners Club card. You can choose to make credit card minimum payments, pay off the entire balance each month, or pay some amount in between. If you don’t pay off the full balance when it’s due, your balance will accrue interest.
That’s one of the quiet dangers of revolving debt: If you haven’t reached your limit, you can continue to borrow while you owe money, which adds to your debt and to the amount of interest accruing on it.
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Now let’s take a look at installment debt. It differs from revolving debt in a few key ways — namely, how you borrow money, how you pay it back, and how interest is calculated.
Installment credit comes in the form of a loan that you pay back in installments every month until the loan is paid off. Think mortgages, auto loans, personal loans, and student loans.
Installment loans can be secured with collateral, or they can be unsecured. Some loans could have fees, and the interest rate may fluctuate, depending on whether you have a fixed or variable rate loan. The loan amount is determined when you’re approved.
There are benefits and drawbacks to both types of debt. Let’s take a look.
Pros:
• Borrow only what you need
• Can access credit quickly
• May qualify for high borrowing limit
Cons:
• Will have a credit limit
• Can have high interest rates
• Can be easy to run up a big balance
Pros:
• Can cover large or small expenses
• Payments are predicable
• Can refinance to a lower rate
Cons:
• Interest applies to the entire loan amount
• Can’t add to the loan amount once it’s finalized
• Long repayment terms are possible
Now is a good time to touch on secured vs. unsecured debt (and why credit card debt is especially pernicious). Mortgages, HELOCs, home equity loans, and auto loans are secured by collateral: the home or car. If you stop making payments, the lender can take the asset.
An unsecured loan does not require the borrower to pledge any collateral. Most personal loans are unsecured. The vast majority of credit cards are unsecured. Student loans are unsecured, and personal lines of credit are usually unsecured.
That means lenders have no asset to seize if the borrower stops paying on unsecured debt. Because of the higher risk to lenders, unsecured credit typically has a higher interest rate than secured credit.
Which leads us to the common credit card trap: The average annual percentage rate (APR) for credit cards accruing interest was 22.63% in early 2024 … and rising. The APR on a credit card includes interest and fees.
Perhaps you can see how “revolvers” — borrowers who carry a balance month to month — can easily get caught in a trap. The average household of credit card revolvers owes $6,380 according to recent data from TransUnion. Some owe much more.
Recommended: Personal Loan vs Personal Line of Credit
As we discussed earlier, common types of revolving credit accounts include HELOCs, credit cards, and personal lines of credit. Each type has features and benefits that are worth knowing.
A credit card, for instance, is convenient to use — especially for everyday purchases — and may come with extra benefits like rewards programs, airline miles, or cashback offers. Depending on the card, you might also have access to purchase protection, which reimburses you for damaged or stolen items.
With a HELOC, you leverage your home’s equity to get the funds you need, up to an approved limit, during a typical 10-year draw period. A HELOC can be a good option if you’re looking to pay for home improvements or ongoing expenses or to cover a financial emergency.
Have a less-than-predictable income or facing a major ongoing expense, like a home renovation? If you have good credit, a personal line of credit may be the right choice. It’s flexible, so you can withdraw money as you need it, though your lender may set a minimum draw amount.
Both installment and revolving debt influence your score on the credit rating scale, which typically ranges from 300 to 850.
Your credit utilization ratio is a big factor. It’s the amount of revolving credit you’re using divided by the total amount of revolving credit you have available, expressed as a percentage.
Most lenders like to see a credit utilization rate of 30% or lower, which indicates that you live within your means and use credit cards responsibly.
The most important element of a FICO® Score is payment history. It accounts for 35% of your credit score, so even one late payment — a payment overdue by at least 30 days — will damage a credit score.
And unfortunately, late payments stay on a credit report for seven years.
Ideally, we’d all avoid interest on credit cards by paying off the balance each month. But if you do carry a balance, you have plenty of company. Forty-six percent of Americans carry a balance on active credit card accounts, recent data from the American Bankers Association shows.
If your revolving credit card debt has become unwieldy, there are ways to try to get it under control.
The fastest ways to pay off debt call for creating a budget to plan how much you will spend and save each month.
With the avalanche method, for example, you pay off your accounts in the order of highest interest rate to lowest. The 50/30/20 budget works for some people: Those are the percentages of net pay allotted toward needs, wants, and savings.
Do you have high-interest credit card balances? You may be able to transfer that debt to a credit card consolidation loan.
Consolidating high-interest credit card balances into a lower-rate personal loan will typically save you money. Most personal loans come with a fixed rate, which results in predictable payments, and just one a month.
Installment loans do not count toward credit utilization. So using a personal loan to pay off higher-interest revolving debt will lower your credit utilization ratio (a good thing) as long as you keep those credit card accounts open. (Yes, closing a credit card can hurt your credit score.)
Homeowners using a home equity loan or HELOC to consolidate high-interest credit card debt can substantially lower their monthly payments. However, their home will be on the line, and closing costs may come into play.
Another method, cash-out refinancing, is a good move only when a homeowner can get a better mortgage rate and plans to stay in the home beyond the break-even point on closing costs.
A balance transfer card is another way to deal with high-interest debt. Most balance transfer credit cards temporarily offer a lower or 0% interest rate. But they may charge a balance transfer fee of 3% to 5%, and they require vigilance.
Make one late payment on the new card, and you’ll usually forfeit the promotional APR and have to pay a sky-high penalty APR. You’ll need to keep track of the day when the promotional rate expires so any balance is not subject to the high rate.
A debt settlement company may be able to reduce a pile of unsecured debt. There are many drawbacks to this route, though.
You will usually stop paying creditors, so mounting interest and late fees will cause your balances to balloon. Instead, you’ll make payments to an escrow account held by the debt settlement company. Funding it could take up to four years.
What’s more, your credit scores will be damaged, there is no guarantee of a successful outcome, it can be very expensive, and if a portion of your debt is forgiven, it probably will be considered taxable income.
This and bankruptcy options are considered last resorts. If you do go with a debt settlement company, know that those affiliated with the American Fair Credit Council agree to abide by a code of conduct.
A credit counseling service might be able to help. The Federal Trade Commission advises looking for a nonprofit program, but it adds that “nonprofit” does not guarantee that services are free, affordable, or even legitimate.
Look into credit counseling organizations affiliated with the National Foundation for Credit Counseling, National Association of Certified Credit Counselors, or Financial Counseling Association of America.
The Department of Justice keeps a list of approved credit counseling agencies. Also check with state and local consumer agencies.
A credit card hardship program addresses temporary setbacks. However, not all card companies have one.
Revolving credit offers flexibility, but if left unchecked can devolve into runaway revolving debt. Credit card debt is especially pernicious, thanks to high interest rates charged to revolving balances. Debt consolidation, one approach to tame mounting revolving debt and the stress that comes with it, aims to lower your monthly payments.
Another option to consider is a lower-interest loan. It will result in a smaller monthly payment amount and just one payment to keep track of each month. The personal loan tends to be funded fast, has a fixed rate, and usually comes with no fees required.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
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Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
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.
SOPL-Q424-019
Read moreA Form 1098 is a tax document that reports amounts that may affect a tax filer’s adjustments to income or deductions from their income on their annual tax return. There are several variations of the form — some are used to report amounts paid and some are used to report charitable contributions made. Any of the forms a person may receive are important documents to refer to when completing annual income tax returns.
Key Points
• IRS Form 1098 is used to report payments like mortgage interest, tuition, and charitable donations that may affect tax adjustments or deductions.
• Form 1098 Mortgage Interest Statement is essential for homeowners claiming mortgage interest deductions.
• Forms 1098-T and 1098-E are important for those who have paid college tuition or interest on student loan debt.
• Other Form 1098 variations include Form 1098-C (for charitable vehicle donations), Form 1098-F (for fines), and Form 1098-MA (for mortgage assistance).
• To claim some of these deductions, you need to itemize deductions on your tax return.
There are several variations of Form 1098. The standard form, Mortgage Interest Statement, is probably the one most people are familiar with. It reflects mortgage interest a borrower paid in a calendar year. If a borrower paid $600 or more in interest on a mortgage debt in a calendar year, they should receive a Form 1098 to use when completing their annual tax return. The form includes the amount of mortgage interest paid and any refund of overpaid interest, the outstanding mortgage balance, mortgage insurance premiums paid, and other amounts related to the mortgage loan.
For those who have paid tuition to a college or university or who have paid interest on student loan debt, the Forms 1098-T and 1098-E may be familiar.
• Form 1098-T, Tuition Statement, includes amounts of payments received by the school for qualified tuition and related expenses. It also includes amounts of scholarships and grants a student may have received, adjustments to those scholarships and grants, and other information.
• Form 1098-E is a Student Loan Interest Statement. Lenders who receive interest payments of $600 or more from a student loan borrower in a calendar year must provide this form to the borrower. The form includes the amount of student loan interest paid by the borrower, the account number assigned by the lender, and other information.
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• Form 1098-C is connected with a very specific form of charitable giving. It shows any donation a tax filer made to a qualifying charity or non-profit of a car, truck, van, bus, boat, or airplane worth more than $500 and that meets other requirements.
• Form 1098-F shows any court-ordered fines, penalties, restitution or remediation a person has paid.
• Form 1098-MA reflects mortgage assistance payments made by a State Housing Finance Agency (HFA) and mortgage payments made by the mortgage borrower, the homeowner.
• Form 1098-Q is connected with a specific form of retirement-savings vehicle, called a Qualifying Longevity Annuity Contract. This form is a statement showing the money the annuity holder received from such a contract over the course of a calendar year.
For homeowners who are still paying mortgage payments, Form 1098-Mortgage Interest Statement is an important part of completing a tax return. A tax filer’s deductions depend on a number of specific factors, but there are some general rules to keep in mind when looking at Form 1098.
• It is necessary to itemize deductions on a tax return to claim the mortgage interest deduction.
• Deductions are limited to interest charged on the first $1 million of mortgage debt for homes bought before December 16, 2017, and $750,000 for homes bought after that date.
• To take the mortgage interest deduction, the property that secures the debt must be a main or second home.
• Separate forms will be provided for each qualifying mortgage.
The potential deduction of interest paid on student loans, shown on Form 1098-E, follows different rules. Notably, this deduction is an adjustment to a tax filer’s income, so it’s not necessary to itemize deductions.
• The student loan interest deduction is limited to $2,500 or the amount actually paid, whichever is less.
• The deduction is gradually phased out or reduced if the taxpayer’s modified adjusted gross income (MAGI) is between $80,000 and $95,000 ($165,000 and $195,000 if married filing jointly) for 2024, and $85,000 and $100,000 ($170,000 and $200,000 if married filing jointly) for 2025.
Form 1098-T provides information that will be useful for tax filers who qualify for education credits provided by the American Opportunity Credit or the Lifetime Learning Credit.
• The American Opportunity Credit may be claimed by certain tax filers who paid qualified higher education expenses. To claim the credit, certain qualifications must be met, including income level, dependency status, the type of program the student is enrolled in, the enrollment status of the student, among others. The maximum credit is $2,500 per eligible student and may be claimed for only four tax years per eligible student.
• The Lifetime Learning Credit may be claimed by certain tax filers who paid qualified education expenses, but has some differences from the American Opportunity Credit. The annual limit is $2,000 per tax return (not per student). It’s not limited to college-related expenses — courses to acquire or improve job skills are also eligible. There is no limit on the number of years this credit can be claimed, and there is no minimum number of hours a student must be enrolled.
Both the American Opportunity Credit and the Lifetime Learning Credit have income phase-out levels. Like the student loan interest deduction provided by Form 1098-E, both of these credits are adjustments to income and don’t require a tax filer to itemize deductions.
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Any of the variations of Form 1098 contain important information for filing your taxes. They all include financial information that has the potential to affect the amount of money a tax filer may be able to deduct. For specific information about a tax situation, it’s recommended to talk to a tax professional. The information in this article is only intended to be an overview, not tax advice.
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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 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 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 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.
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.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Checking & Savings Fee Sheet for details at sofi.com/legal/banking-fees/.
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.
SOBNK-Q424-075
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