Jan
23
2024
How to Set Up a Fundraising Bank Account

How to Set Up a Fundraising Bank Account

By | Budgeting & Goals, Financial Independence, money | Comments Off on How to Set Up a Fundraising Bank Account

Fundraiser bank accounts offer a way to help take care of those in need, and they are typically easy to establish. You may have heard about these accounts on your local news. They are used in such situations as people donating to help a neighbor rebuild a flooded house or pay medical bills when facing a tough diagnosis.

If you are planning to raise money on someone else’s (or a cause’s) behalf, opening a fundraising bank account could be a good option. But how you do so will depend on what the account is for. Here’s a closer look at what a fundraising bank account is and how it operates.

What Is a Fundraising Bank Account?

A fundraiser bank account is one set up specifically to hold donations. For most of us, that means donations to a small cause, be it ourselves, another individual, or a small group of people. A fundraising bank account sets aside the money specifically for the beneficiary (or beneficiaries), though it may not be opened by the individual who will benefit. Some points to consider:

•   Keep in mind that opening a bank account for fundraising is different from donating to a charity. These are bank accounts people set up to hold donations to an individual or family as opposed to starting a full-on charity of their own.

•   A fundraising bank account is not the only way to capture donations. Most major crowdfunding platforms make it easy to accept donations through the platform itself, or you may also be able to take donations via peer-to-peer transfer services. The money could then be transferred directly to an individual’s personal checking or savings account.

•   Unless you’re offering something in return for the money or the total donations, it’s not considered taxable income, though the crowdfunding platform may report the transactions to the IRS.

That said, opening a fundraising bank account can still be the best option for some situations. It can provide more formal protections for beneficiaries and assure the donated monies are separate from other funds.


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What Is Needed to Set Up a Fundraising Account?

What you need to set up a fundraising bank account will vary depending on the bank you choose and even the local laws in your area. A good first step: Explain the purpose of your account to the bank when you open it. This way, they will have a full picture of what your goal is and be able to guide you.

Your Identification Information

Just like when you open a new bank account, you’ll need identifying information such as a Social Security number, name, and address — but whose identifying information you need will vary. If the fundraising account is for donations to you as an individual, your own information will be needed.

The Beneficiaries’ Identification Information

But if you’re opening an account for a someone else to benefit from, it may make more sense to open the account with their credentials. In fact, if you can, bring them to the bank with you and have them open the account in their own name. A bank may or may not allow you to open an account for another person if they’re not present or haven’t provided signed and notarized forms.

If the beneficiary doesn’t have a Social Security number or you’re opening the account for multiple beneficiaries, you may need to obtain an Employer Identification Number, or EIN, from the IRS for the account. (This is simply a way for the IRS, or Internal Revenue Service, to keep tabs on the money for tax-reporting purposes — it doesn’t, in this case, have anything to do with being someone’s employer.)

What to Do With the Money While It Is Being Raised

When you are gathering funds to support a charity or help a person in need, it’s vital to keep it safe. A smart way to do that: Make sure that money gets into the bank account ASAP. Depositing it directly will protect it from possible loss. As other deposits come in, the balance will grow until the happy day you are able to distribute it to the individual or charity that will benefit from your kindness.

Things to Consider With a Fundraising Bank Account

There are some complications that can arise when opening a bank account for fundraising. Some examples:

Fundraising Accounts for Deceased Beneficiaries

In some cases, you may be raising money to pay for a deceased person’s funeral costs or to provide living expenses for loved ones left behind. Of course, if someone has passed away, you can’t use their Social Security number to open an account — so you’ll need to obtain an EIN, as mentioned above, and again, let the bank know explicitly the purpose of the account.

Fundraising Accounts for Minor Beneficiaries

Perhaps you want to help collect money for a child who needs cash for medical or educational expenses. Be forewarned that raising money for minors can come with a variety of complications — including the problem of ensuring the minor uses the money for what it’s being set aside for.

•   Establishing the account by or for the child’s legal guardian is a good way of safeguarding the funds and making sure they’re being used for the intended purpose.

•   If that option is unavailable, you might consider setting up a trust fund — which involves putting the legal responsibility for the money into a third party’s hands, with the added option of specifying certain ways the money can be used. An attorney can guide you through the process of setting up a trust.

Tax Consequences

As mentioned above, gift funds received in a fundraising bank account may not be taxable as income — although there are exceptions, and you should always consult a tax professional to be sure you understand the tax liabilities of your planned actions. For example, if the account the donations are being held in earns interest, taxes may be assessed on those earnings.

In addition, keep in mind that these kinds of donations are not considered charitable donations, and so will not be tax deductible for the donor.

Can the Bank Be Held Liable if Funds Are Misused?

Unfortunately, scammers do exist — and it’s possible that some people who set up fundraising bank accounts may end up using the monies for a purpose other than what was promised to the donors. If you’re setting up an account in good faith for someone else’s use, it’s worth checking with the bank about who’d be liable if the beneficiary misused the funds.

It’s not unheard of for banks to request that they be indemnified if this should happen and the money isn’t used according to the fund’s original intention.

Are There Safeguards in Case of Fraud?

It’s upsetting to think about, but yes, fraud does happen. People have been known to take advantage of the compassion of do-gooders and use the money raised to pay for things other than to fund’s intention.

•   Setting up a formal trust is one way to ensure the funds can only be used within the proper parameters.

•   You can also check with the bank to learn if there are any other safeguards in place in case of bank fraud.

The Takeaway

Opening a fundraising bank account is one way to set aside money being gathered for an individual or small group. The funds will be protected and can accumulate to help the beneficiary. When acting on good intentions, though, it’s important for the account’s creator to understand how these accounts function, what’s required to open one, and that they don’t afford any tax deductions for donors. With these steps taken, you can be well on your way to helping those in need or a cause that moves you.

On the topic of bank accounts, how are your own accounts doing?

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

How do I set up a charity account?

To set up a fundraising bank account, you’ll need to explain to the bank the purpose of your account and ensure you have all the information they need, likely including the beneficiary’s Social Security number.

Do I need a tax ID for a fundraiser?

Depending on the type of account you set up and whether or not the beneficiary’s Social Security number can be used, you may need to get a tax ID number (such as an Employer Identification Number, or EIN) in order to open the account.

How do you account for donations?

All donations should be tracked for tax reporting purposes — and keeping them in a separate account makes it easy to see which funds are personal and which are gifts.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% 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 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.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

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

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.

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.

SOBK0124017

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Jan
21
2024
What Is a CD Ladder? CD Ladder Strategy

CD Ladder: What It Is, Examples, and How to Build One

By | Budgeting & Goals, Financial Independence, money | Comments Off on CD Ladder: What It Is, Examples, and How to Build One

When it comes to saving for your best financial future, you’ve got lots of options — including CD ladders.

A CD ladder, or certificate of deposit ladder, is a financial strategy that involves purchasing certificates of deposit with staggered maturity dates. It allows you to access the best aspects of CDs (namely, a relatively high yield at a relatively low risk rate) while avoiding the main downside of CDs (having your money locked away for a long period of time). It can help you access cash when and if needed without paying early withdrawal penalties.

Setting up a CD ladder up can require a bit of strategizing and shopping around to get the right arrangement for needs. Here, you’ll take a closer look at:

•   What is a CD ladder?

•   How does a CD ladder work?

•   How do you create a CD ladder?

•   What are alternatives to a CD ladder?

What Is a CD Ladder?

In order to fully understand CD ladders, first know that a certificate of deposit, or CD, is a kind of savings vehicle. You put down a lump sum — such as $500 or $5,000 — for a set amount of time (typically between six months and a few years) in exchange for a guaranteed growth rate (i.e., interest).

Generally speaking, the highest interest rates require large deposits put down for a long period of time. Your money gets locked up, and you’ll usually pay a penalty for early withdrawal.

That’s where a CD ladder comes in. It can help you feel secure that you can access your money when needed, without having to pay a penalty. You invest your money in a variety of CDs with different maturity dates. Generally, each rung, or individual CD, will mature one year later than the previous one.

Then, as each CD matures and you’re able to access your money (plus the interest you’ve earned), you can reinvest it in another CD with the longest of the terms you’ve chosen. This means you’ll continue to earn money on your investment for double the term of the longest-term CD you took out initially.

💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.

Example of a CD Ladder

Let’s say you have $15,000 to invest. You decide to set up a CD ladder with five rungs.

Here’s what that might look like:

•   $3,000 to a one-year CD

•   $3,000 to a two-year CD

•   $3,000 to a three-year CD

•   $3,000 to a four-year CD

•   $3,000 to a five-year CD

Once the one-year CD comes to fruition, you’d reinvest that $3,000, plus whatever interest it earned, into a new five-year CD — and follow the pattern for each CD as it comes due. In this way, you can continue the ladder for a grand total of 10 years, reaping and reinvesting once annually.

Of course, if rates shift or your financial situation changes and you need cash, you have a built-in backup plan. By creating a ladder, you know at least once a year, you will have the opportunity to invest your money in a different vehicle or use it for, say, an emergency or a goal you’ve been saving towards.

Keep in mind, too, that you don’t have to equally distribute your full investment among the rungs. You could invest different amounts at each level if that better suited your needs.

And you don’t need to open all of your CDs at the same bank, either. You can shop around among banks and credit unions to find the best interest rates at different levels and thereby maximize your yield.

All in all, CD ladders offer investors additional flexibility in their approach while still creating a low-risk earning strategy. Win-win!

How to Build a CD Ladder

Building a CD ladder is pretty easy. Here are the key steps:

Gather Your Funds

Save up a chunk of money that you can afford to have locked up for at least a few months or a year. If you already have the money set aside, you’re ready to move onto the next step.

Choose the Length of Time That Will Suit You

As noted above, you might decide to buy CDs with different maturity terms, or you might prefer to buy a number of ones with the same term over time, as you accrue more savings.

Research Your Options

Shop around for the best rates and terms at financial institutions you feel comfortable with. Remember, you don’t have to stick with one bank. You could buy a six-month CD from one bank offering a great rate, and a one-year one from a different bank that has a terrific APY.

Buy Your CDs

You’re now ready to distribute your savings among a series of CD ladder “rungs,” starting with a short-term maturity date and ending with a long-term maturity rate. (Many investors use five rungs, but you could use more or less if you wanted to.)

Manage Your CD Ladder

As the CDs mature, you can determine whether to withdraw the funds or invest again.

Here’s an example of what a CD ladder might look like:

Amount

 Term

 Interest Rate

 Bank
$500 6 months 5.50% BMO Alto
$1,500 12 months 5.51% CIBC Bank USA
$2,000 18 months 5.65% Hyperion Bank
$3,000 24 months 5.39% Digital Federal Union

Recommended: Guide to Catching up on Late Payments

Benefits of CD Laddering

There are several benefits of CD ladders, including:

•   They allow you to make the most of your CD investment without locking away all the money for a long term.

•   They increase investor flexibility since you get to decide what amount you put in each CD and how long each term along the ladder is.

•   You may be able to take advantage of better interest rates since you’ll be reinvesting on a yearly basis, as opposed to having your money locked away at a certain rate for the long term.

•   Overall, CDs are a safe, FDIC-insured investment strategy, though their earning potential is also relatively low.

Recommended: Different Ways to Earn Extra Money with Interest

Drawbacks of CD Laddering

On the other hand, there are some downsides to CD laddering that are worth mentioning:

•   Even the best CDs have relatively low interest rates — so low that they may not even keep up with inflation.

•   You may be missing out on an opportunity to invest your money into the stock market, where it could stand to earn exponentially more than it would in a CD — though, of course, the stock market is a much riskier investment strategy.

•   If rates fall during the course of your CD ladder, you might wind up reinvesting your money into a CD with an even lower rate.

Alternatives to CD Ladders

Is CD laddering not sounding quite right for your needs? Here are some alternatives that might better suit your needs.

•   Putting your money into a high-yield savings account, which may offer a similar (though potentially slightly less lucrative) low-risk growth potential. The upside here: It doesn’t keep your money locked up for a long period of time.

•   Investing your money in the stock market, which is considerably riskier but may offer higher returns than CDs over the long run.


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The Takeaway

CD laddering is one useful strategy for investing your money over time, allowing you to take advantage of the best parts of CDs while avoiding some of their biggest downsides (like locking away your money for years). The laddering effect, which involves staggering the CDs’ maturity dates, can give you access to some of your money every year and allow you to possibly reap a higher interest rate if the market is rising.

That said, CD ladders aren’t for everyone. High-yield bank accounts are another option to consider.

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

Is laddering CDs worth it?

As with any financial decision, only you can decide if laddering CDs is the right approach for your needs. If you have a lower risk tolerance and a decent amount of money to invest, it may be a strategy worth considering to earn steady interest and have regularly scheduled access to your funds.

Can you lose money in a CD?

CDs are a very low-risk investment vehicle. The funds in them are FDIC-insured up to the standard $250,000 per depositor, per account ownership category, per insured institution, which means the FDIC will refund your money up to that amount should the bank you opened the CD with fail. That said, there are some kinds of CDs which are not FDIC-insured, so you’ll want to make sure to double-check before you sign any paperwork.

When would you use a CD ladder?

A CD ladder can be a good investment strategy when you have a nice sum of money available (say, $500 to a few thousand or more), have a low risk tolerance, and can afford to lock up your money for a period of time, from six months to several years. It is best used when rates are relatively high, especially since you can shop around for the best rate at each “rung” on your ladder.

Photo credit: iStock/Antonbr Anton

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% 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 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.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

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

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

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

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Jan
21
2024
What Are Penalties for Early CD Withdrawal?

CD Early Withdrawal Penalty, Explained

By | Budgeting & Goals, money | Comments Off on CD Early Withdrawal Penalty, Explained

Certificate of deposit accounts lock in your money for a certain period and guarantee an interest rate. But sometimes, life happens in the middle of the CD’s term. You have a dental emergency, your car needs new tires, or (yes, please!) a friend offers you a once-in-a-lifetime opportunity to join a trip to Barcelona but you just don’t have cash on hand to afford it. In these and other situations, you may be tempted to crack into a CD.

Should you do so, however, you will likely have to pay an early withdrawal penalty since you aren’t sticking with the agreed-to maturity term (the amount of time the CD was set for). You might forfeit some or all of the interest earned as a result. Read on to learn more about early withdrawal penalties for CDs and how to avoid them.

What Is a CD Early Withdrawal Penalty?

First, what is a CD? In simple terms, it’s an FDIC-insured time deposit. When you open a certificate of deposit account, you’re depositing money for a specific time frame. Depending on the CD, this may be as little as 30 days or as long as 10 years.

As the CD matures, your balance can earn interest. Generally, the longer the term, the higher the interest rate and APY. However, if you take money out before the maturity date, the bank can charge a CD withdrawal penalty.

Federal law sets the minimum penalty for early CD withdrawal at seven days’ interest if you withdraw money within the first six days after deposit. Banks can set the maximum CD withdrawal penalty higher.

The amount you might pay for withdrawing money from a CD early can depend on several factors, including:

•   Maturity term of the CD

•   How long the CD was open before you made the withdrawal

•   The amount of the initial deposit and the amount that’s withdrawn.

Your bank may or may not allow you to make a partial early CD withdrawal. If you’re not able to withdraw a partial amount, you might have to cash out the whole CD which could result in a larger penalty.

💡 Quick Tip: Make money easy. Open a bank account online so you can manage bills, deposits, transfers — all from one convenient app.

How to Calculate an Early Withdrawal Penalty for a CD

You’re probably wondering just how steep a penalty you’d have to pay for early CD withdrawal. Are we talking $5 or 5% of the money invested? More?

Banks are required to provide you with certain disclosures regarding your accounts, including CD accounts. So the first step in calculating what you might pay for a CD early withdrawal penalty is to review your bank’s policy.

Again, this can vary depending on the bank. So, for example, here’s what a few banks charge if you make an early withdrawal from CD accounts. All penalties are deducted from the CD’s principal.

CD Term

CD Early Withdrawal Penalty

1 year

•   180 days’ interest

•   3 months’ interest

•   Half of interest the money would have earned over entire term or 1% of the amount withdrawn, whichever is greater, plus $25

3 years

•   180 days’ interest

•   6 months’ interest

•   Half of interest the money would have earned over entire term or 3% of the amount withdrawn, whichever is greater, plus $25

You should be able to find this information readily available on your bank’s website. But if not, you can contact your bank or visit a branch to get more details on the penalties for early withdrawal from a CD. In addition to telling you what the penalty is, the bank should also be able to tell you how the penalty is calculated.

Banks may calculate the penalty for early CD withdrawal based on:

•   The amount withdrawn

•   The entire balance

•   Daily interest or monthly interest.

Calculating a CD Early WIthdrawal Penalty

Want to get a little more granular? Let’s dive into a little basic math to show you how the numbers look. Using Chase as an example, we see that the bank uses the amount withdrawn as the basis for calculating CD early withdrawal penalties. The calculation uses daily rather than monthly interest.

So the formula for calculating the penalty you might pay for an early CD withdrawal would look like this:

Penalty = Amount withdrawn x (Interest rate/365) x number of days’ interest.

So, say you have a 12-month CD that’s earning a 5% APY. You withdraw your initial $5,000 deposit six months prior to the CD’s maturity date. The math would look like this:

$5,000 x (0.05/365) x 180 = $123.29

You could also use an online CD early-withdrawal penalty calculator to figure out how much interest you might forfeit if you decide to withdraw money from a CD ahead of schedule.

Get up to $300 when you bank with SoFi.

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Ways to Avoid Early Withdrawal Penalties for a CD

There are some options for avoiding prepayment penalties associated with early CD withdrawals. The strategies you could try include:

•   Withdrawing only the interest earned. Your bank may allow you to withdraw the interest earned on a CD without assessing a penalty. This assumes that you don’t touch the principal amount at all. This could be an attractive option if you need some quick cash but don’t necessarily need or want to withdraw your initial deposit.

•   Requesting a waiver of the penalty due to a crisis. If you are really in a bind, your bank may honor this.

•   Tapping your rainy-day money instead, but this should really only be done if you have the right reason to using your emergency fund.

•   Opening a no-penalty CD account. Banks can offer CDs that don’t charge a penalty for early CD withdrawal. The trade-off is that no-penalty CDs may offer a lower interest rate and APY, so you’d have to consider whether the convenience afforded by no-penalty CDs outweighs earning a higher rate.

•   Building a CD ladder. A CD ladder is a collection of CD accounts, each with varying maturity terms. So you might have five CDs with maturity dates spaced six months apart. The idea is that you can avoid early withdrawal penalties because your next maturity date is always on the horizon.

•   Consider a CD-secured loan. You may find some lenders who offer a CD-secured loan, but review the terms carefully and be sure you can make the payments at a time when money is tight.

Recommended: What Does Private Banking Offer?

When to Withdraw CDs Early

Withdrawing money from a CD early, even if it means triggering an early CD withdrawal penalty, could make sense in some situations. Some examples:

•   If you have an emergency situation with no other cash reserves to rely on and you want to avoid using credit, it may be the best (or only move). For example, say your car breaks down and you need $5,000 to fix it, but you only have $1,200 in your emergency fund. Then paying a CD withdrawal penalty could be worth it. This move would allow you to avoid having to charge the expense on a high-interest credit card or take out a loan.

•   Paying a penalty for early CD withdrawal could be worthwhile if your interest rate is low. You could access the funds and, with what you don’t use up, roll the money into a new CD with a higher APY. You’d have to calculate the amount of the penalty for withdrawing money early and compare that to the interest you could earn with a new CD to decide if it’s worth it or not.

Recommended: 10 Personal Finance Basics

The Takeaway

Investing in CDs can make sense if you want a safe way to earn interest on money you don’t necessarily need for the near-term. But sometimes, you’ll feel you must withdraw money early from a CD, despite the fact that you locked in for a specific term and interest rate. When doing so, you’ll face penalties, which may or may not make this transaction worth it to you. You can also follow a couple of smart money strategies to make sure you avoid triggering early CD withdrawal penalties in the future, because who wants to pay fees unless you absolutely have to?

If you hate penalties and fees, it can be wise to consider all your possibilities in terms of where to keep your money.

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

What happens if I take money out of a CD early?

If you withdraw money from a CD early, you will likely be assessed a penalty, which is often all or some of the interest earned, and possibly a fee.

Can I write off a CD early withdrawal penalty?

If you wind up paying an early withdrawal penalty, you can deduct the amount from your taxes, even if it’s greater than the interest earned.

Photo credit: iStock/tolgart

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% 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 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.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

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

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.

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.

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

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21
2024
Your 2022 Tax Season Prep List

Tax Preparation Checklist 2024: Documents You Need to Gather

By | Budgeting & Goals, money | Comments Off on Tax Preparation Checklist 2024: Documents You Need to Gather

Yes, it’s that time again: Tax Day is approaching. When April 15th rolls around, it’s the deadline for filing returns.

This isn’t a task you want to leave for the night before. Taxes can be complex, and it can be time-consuming to complete even a fairly simple return. Preparing in advance can be an excellent idea.

Whether you plan to file on your own or use a professional tax service, you will need to gather a number of forms and documents. This checklist will help you pull together the information and paperwork you need to make the process go that much more smoothly.

The Basics of Filing Taxes

In a nutshell, filing your taxes tracks your income, taxes already deducted during the year, any credits and deductions, and other factors that impact what you may owe.

Below, you’ll learn about what documents you need to file your income taxes. The IRS (Internal Revenue Service) collects taxes from any business or individual that receives a regular monthly income. There are currently seven different tax brackets that divide individuals according to their annual earnings.

Of course, each person’s situation is unique, with different earnings, deductions, and circumstances that may impact how much they owe (or get refunded, in some cases). You can explore an in-depth guide to the 2024 tax season for more details, but now, consider the information you’ll need to collect before you can finalize your return.

💡 Quick Tip: Tired of paying pointless bank fees? When you open a bank account online you often avoid excess charges.

Personal Information

First things first on your tax prep checklist: Follow this list of tax documents to gather and information to note:

•   Your Social Security or tax ID number

•   If married, you’ll need your spouse’s Social Security or tax ID number and birthdate

•   Any identity protection PINs issued to you or family members by the IRS (Internal Revenue Service)

•   Your bank account number and routing number for the deposit of any refund you may be due or payment you owe, it you choose to pay that way

•   Any foreign residency and reporting details, if that applies to you.

Dependents’ Information

If you have dependents, you’ll want to gather similar details about them, as above. The IRS defines a dependent as a qualifying child (who is either under age 19 or under age 24 if they’re a full-time student), or could be any age if considered to be permanently disabled. A qualifying relative can be a relative (say, a sibling or parent) who, if they have income, does not provide more than half of their own annual support. (One note: A spouse cannot be claimed as a dependent.)

In addition to dates of birth and Social Security or tax ID numbers, you will need records of child care expenses (and providers’ tax ID numbers), if applicable; details of earnings of dependents; and potentially form 8332 relating to custodial agreements for children, as needed. (You’ll learn a bit more about possible family-related tax deductions and credits below.)

Sources of Income

Next on the tax preparation checklist is to gather paperwork about your sources of income. Typically, this means W-2 and/or 1099 tax forms.

•   For full-time employees, this will often be a W-2 form.

•   For those who are self-employed (such as freelance and contract workers), 1099s will be needed. These are forms that document payment of funds from different entities.

•   If, say, you earn money selling items on Etsy or a similar marketplace, you might receive a 1099-K form if your earnings cross a certain threshold.

•   If you are unemployed, you will want to be sure you have a form 1099-G reflecting this.

•   If you have earned interest on your money or dividends on investments, sold investments, then you will want to collect your 1099 forms that track these amounts.

•   You will also need to pull together any 1099 forms that document Social Security or income from a pension, IRA, or annuity.

•   Other forms of income will need to be accounted for as well, including jury duty, prizes, awards, gambling winnings, trust income, passive income (such as earnings on a rental property you own), and royalties, among others.

Types of Deductions

Now that you’ve covered what you earn on the tax document checklist, it’s important to track possible deductions, which can lower your tax burden. Essentially, when you take a deduction, you lower the amount of income that will be taxed.

Many of these deductions will involve 1098 documents. Here are some of the more common tax deductions possible:

•   Medical Expenses: You may be able to deduct some medical expenses, so it’s wise to gather records of how much you paid. If your medical bills exceed 7.5% of adjusted gross income, these can be deducted.

•   Retirement and Investment Account Contributions: Traditional IRA contributions are seen as deductible, as well as some 401(k) contributions, and other contributions, up to certain limits.

•   Mortgage & Property Taxes: Interest on your mortgage, property and real estate taxes may be deductible so gather your paperwork related to homeownership.

•   Charitable Donations: Some types of donations made by individuals and businesses can be deducted.

•   Motor Vehicles: Individuals who use a car strictly for business purposes may be able to take a deduction.

•   Child Care Costs: These may be deductible, so gather receipts and tax ID numbers from providers.

•   Educational Expenses: Student loan interest and other expenses related to your education can be tax-deductible. Depending on the type of loan taken out, some student loans may be tax deductible.

•   Home Office Costs: You can typically claim some of the price you pay for having a home office, as well as other qualifying business expenses.

•   State, Local, and Sales Taxes: Other than wage withholding, you may be able to deduct taxes paid on goods, services, and income on a state or local level.

Tax Credits

Before you wrap up your tax prep checklist, you’ll want to collect any paperwork that could help you snag tax credits. As for deductions vs. tax credits, while a deduction lowers your taxable income, a credit gives you a dollar-for-dollar deduction in your tax liability. So if you can claim a $2,500 credit, that means your taxes owed are reduced by $2,500.

Here, some credits that can help you save on your taxes:

Student Credits

You may want to look into the following:

•   American Opportunity Tax Credit: Up to $2,500 credit for qualifying educational expenses for eligible students during the first four years of higher education

•   Lifetime Learning Credit: Up to $2,000 per year for qualifying tuition and expenses for eligible students

Family and Dependent Credits

Consider whether you are eligible for:

•   Child Tax Credit: Up to $2,000 for a qualifying child under age 17

•   Child and Dependent Care Credit: You may be able to get back some of your expenses towards child or dependent care.

•   Earned Income Tax Credit (EITC): For low- to middle-income workers, the EITC could be from $600 to $7,430, depending on qualifying factors.

•   Adoption Credit: If an adoption was finalized in 2023, the adoptive parents may be eligible for a federal tax credit of up to $15,950.

Homeowner Credits

•   Home Energy Tax Credits: You might be able to take a credit of up to 30% on the costs of clean, renewable energy systems/equipment for your home, up to a limit.

Missed Deadline Penalties

Here’s another reason to prioritize this tax preparation checklist: If you don’t have your documents gathered and your return prepared, you might file late…or not be filing at all.

There are various penalties involved when you do not file any tax returns or miss the deadline. The IRS has procedures and regulations around missing any deadlines, and how penalties can impact future tax filings.

These penalties include:

1.   A 5% levy on taxes owed per month for every month missed after the April 15th deadline for missing the tax deadline.

2.   After the 60 days late mark, a minimum penalty kicks in of $485 or 100% of the taxes owed, whichever is less.

3.   A 0.5% levy on any taxes owed, if you fail to pay, even if you’ve filed before the initial deadline.

4.   A 25% penalty levy regulated by the IRS due to overdue taxes and filing.

Interest also accrues on unpaid taxes, adding to the cost. Since all of this can cost you money and create considerable stress, it’s a good idea to get a headstart to you have your tax prep documents together and can file on time.

The Takeaway

Filing taxes can be complicated and require gathering various forms and figures. It’s wise to start early and collect information related to your income, dependents, and possible deductions and credits.

Additionally, being prepared in advance to receive any refunds or make any potential subsequent tax payments is important. It can be wise to have a checking and savings account that earns you interest while making it simple to track your cash.

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.

Photo credit: iStock/simpson33

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% 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 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.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

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

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

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

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Jan
21
2024
Transferring Money From a Credit Card to Your Bank Account: What to Conside

How to Transfer Money From Your Credit Card to Your Bank Account

By | Financial Independence, money | Comments Off on How to Transfer Money From Your Credit Card to Your Bank Account

If you’re in need of cash, you might wonder if it’s possible to transfer money from a credit card to a bank account. The answer is yes, but it’s important to understand the costs and interest rates involved. You’ll also want to consider the potential impact on your credit score, and how you’ll pay the money back.

Read on to learn the nuts and bolts of how to transfer money from a credit card to bank account, the pros and cons of using your credit card to access cash, and a list of alternative options that may help you get the money you need.

🛈 Currently, SoFi does not allow members to transfer money from a SoFi credit card to their SoFi Checking & Savings account.

How Do Transfers From a Credit Card to a Bank Account Work?

When you transfer money from a credit card to a bank account, it’s considered a cash advance. This means that instead of using your credit card to pay for a purchase, you’re tapping your credit line for a lump sum of cash. Once the money is transferred to the bank, you can spend it as you wish or transfer it to another bank account.

The amount of cash you can access through a cash advance can’t exceed the current available balance on the credit card. Often, you can only access up to your cash advance credit limit, which is typically significantly lower than the full credit limit on the card.

Unlike purchases you make with your credit card, interest on a cash advance starts accumulating right away — there’s no grace period for a cash advance. You may also be charged a cash advance fee for using the service. This might be a flat fee or it could be a certain percentage of the amount you transfer to your bank (often around 3% to 5% of the amount being transferred).

If you’re thinking about getting a credit card advance as a way of racking up cash back or travel points, you’ll want to think twice: Cash advances typically don’t qualify for credit card rewards.

5 Ways to Transfer Money From a Credit Card to a Bank

If you’re wondering how to transfer money from a credit card to a bank account, you actually have a few different options. Here are some to consider.

Visit a Bank Branch

If you have a credit card issued by a bank, you can visit a local branch of that bank and ask a teller to withdraw funds from your credit card using the cash advance feature. If you have a checking or savings account at that same bank, the teller can deposit those funds into your account. If not, you may need to bring the withdrawn cash to the other bank to deposit the funds.

Use an ATM

You can get a cash advance at an ATM but you’ll need a PIN. If you’re not sure what your PIN is, you can call the number on the back of the card.

Once you have a PIN, you can make the transfer by inserting the card into the ATM, choosing the cash advance option, and entering the amount you want to withdraw. You’ll need to accept any associated fees, then complete the transaction. If you have a credit card and a bank account with the same bank, you may be able to have the cash deposited directly into your bank account. If not, cash will be dispensed and you’ll need to deposit the money into your account.

Transfer Money Online

If your credit card and bank account are with the same institution, you may be able to do the transfer online or through your bank’s mobile app. To do this, you simply need to sign into your account and select Transfer. Choose the credit card for Pay From and the bank account you want the money transferred to for Pay To. Finally, you’ll need to select the amount you want advanced and approve the cash advance. After a few minutes, you can check your bank account to make sure the money was transferred.

Use a Credit Card Convenience Check

If your credit card originally came with convenience checks, you can use one of those checks to transfer money from a credit card account to any type of bank account. If you don’t have checks, you may be able to order them.

To use a convenience check to transfer money from your credit card to your bank account, you simply write the check out to yourself and then deposit it in your bank account.

Keep in mind that these checks work in the same way as a cash advance at an ATM. Typically, they require paying the same cash advance fee and cash advance APR, and the grace period may not apply.

Redeem Cash Back Rewards

If you have a rewards credit card and you have racked up a good amount of points, you may be able to transfer them into your checking account as cash. This is not a cash advance and, as a result, doesn’t involve interest, fees, or the need to repay the sum. However, not all cash back credit cards allow this. And some credit cards only allow you to transfer rewards as cash to a bank account if the bank account is at the same bank that issued the credit card.

Pros and Cons of Transferring Money From Your Credit Card to Your Bank Account

There are advantages to using a credit card to transfer cash to a bank account but also some considerable downsides. Here’s a closer look.

Pros

•   Quick access to funds: Depending on the method you use, transferring money from your credit card to your bank account can take less than 30 minutes. You don’t need to spend time seeking a loan or awaiting approval.

•   Can be helpful in an emergency: If you’re in a temporary financial bind and don’t have an emergency fund, a transfer from your credit card to your bank account can be a reasonable solution, provided you’ll be able to repay the advance quickly.

•   Better option than a payday loan: Transferring money to your bank account via a credit card cash advance isn’t an ideal way to access credit, but can be preferable to a payday loan. Payday loans typically come with sky-high interest rates and fast (often two-week) repayment periods. If you can’t repay on time, you get hit with another round of fees, sinking you deeper into debt.

Cons

•   High interest rates: Cash advance interest rates are sometimes higher than credit card purchase APRs. Plus, interest starts accumulating as soon as you transfer the money. Unlike making purchases with your credit card, there is usually no grace period.

•   Additional fees: Cash advances also come with fees, which may be 3% to 5% of the amount you’re borrowing, adding to the total cost.

•   Potential damage to credit: Your credit scores typically won’t be impacted if you repay the money from the cash advance promptly. But cash advances can affect your credit utilization ratio, which is the amount of credit you’re using versus your total available credit. If the added balance of a cash advance goes unpaid for a while, it could hurt your credit.

•   There are more affordable ways to borrow money: Getting a personal loan, a home equity loan, or a home equity line of credit (HELOC) will typically cost less than a cash advance transfer from your credit card to your bank account.

Alternative Ways to Transfer Money to Your Bank Account

Thanks to high interest rates and fees, a credit cash advance generally should not be your go-to for borrowing money. If you’re in need of extra cash, here are some other options to consider.

Personal Loan

A personal loan is a type of loan that allows flexible use, short- to moderate-term repayment options, and relatively quick funding. Available through banks, credit unions, and online lenders, these loans typically come with fixed interest rates and predictable monthly payments. Most personal loans are unsecured (meaning no collateral is required). However, secured personal loans, which are easier to qualify for, may also be worth considering.

Home Equity Loan or Line of Credit

If you own your home and have built up equity in it, you might be able to borrow against that equity to access the money that you need. A home equity loan is disbursed in one lump sum that you pay back in equal monthly installments over a fixed term (typically five to 30 years) at a fixed interest rate. A home equity line of credit (HELOC) gives you access to a credit line that you can tap as needed. You only pay interest on what you use.

401(k) Loan

If you have money saved for retirement in a 401(k) account, it may be possible to borrow against it, provided your employer allows this type of program.

With a 401k loan (also called a retirement loan), you take money from your retirement account with the understanding that you will make regular payments, with interest, back into your account. The fees involved will vary depending on your plan administrator. You usually have five years to repay a retirement loan.

Salary Advance

Rather than transferring money from your credit card to your checking account bank account, you might be able to receive a portion of your paycheck early. Whether or not this is an option will depend on your employer’s policies. Some employers offer salary advance programs or will consider a salary advance on a case-by-case basis.

Depending on the program, you might repay the advance a little at a time or all at once. While there may be administrative fees and other costs, some programs don’t cost anything, making this a reasonable alternative to a high-interest credit card advance.

The Takeaway

It’s possible to transfer money from your credit card to your bank account using the cash advance feature. However, you generally only want to do this in the event of an emergency. Cash advance fees and interest rates make this an expensive borrowing option that could lead to a dangerous cycle of credit card debt.

To avoid the need to transfer money from your credit card to your bank, it’s a good idea to keep at least three to six months’ worth of basic living expenses set aside in a separate emergency savings account that earns a competitive interest rate. This will serve as a safety net in case you get hit with a major unexpected bill or lose income.

FAQ

Will transferring money from my credit card to my bank account hurt my credit score?

Your credit scores likely won’t be impacted if you repay the money from the cash advance promptly. However, cash advances can affect your credit utilization ratio, which is the amount of credit you’re using versus your total available credit. A high credit utilization ratio (typically anything above 30%) can have a negative impact on your credit scores since it implies you rely heavily on borrowed money.

If the added balance of a cash advance transfer to your bank account goes unpaid for a while, it could adversely affect your credit scores.

Is it a good idea to transfer money from a credit card?

A credit card cash advance can be a quick and easy way to get cash fast, but these transfers come at a high cost. Cash advance annual percentage rates (APRs) are often higher than credit card purchase APRs. Not only that, the interest begins to accrue the day you can get the cash. This can lead to a dangerous cycle of debt that can be hard to break. Cash advances also usually come with fees, adding to the cost.

How much does it cost to transfer money using my credit card?

The cost will depend on the credit card issuer. Transferring money to your bank account using your credit card’s cash advance feature usually requires a 3% to 5% fee. You’ll also pay interest on the advance, starting the day you get the transfer. The annual percentage rate (APR) on a cash advance will vary by card issuer but is generally higher than the APR for purchases.

What is the best way to transfer money from credit card to bank?

To transfer money from a credit card to a bank account, you typically need to use your card’s cash advance feature. If your credit card and bank account are with the same institution, you may be able to do the transfer online or through your bank’s mobile app. You can also access a cash advance by going to an ATM or using your credit card’s convenience checks.

Keep in mind, though, that a cash advance usually comes with fees, and interest begins to accrue on the money right away.

How can I get money from my credit card to my bank account without a fee?

You typically can’t get a cash advance from your credit card without paying fees and interest. However, there may be one workaround: If you have a rewards credit card and you have racked up a good amount of points, you may be able to transfer them into your checking account as cash without paying any fees or interest (since it is not a loan).

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SoFi members with direct deposit activity can earn 4.00% 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 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.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 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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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.

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

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