money Archives | Page 29 of 167

Oct

2024

Tax-Deductible or Not? Your Guide to End-of-Year Donations

By Ashley Kilroy | Budgeting & Goals, Financial Independence, money | Comments Off

At the end of the year, when holiday celebrations and expressions of gratitude are in full swing, many people think about making a charitable donation. If you donate to a qualifying organization, not only can your funds do good, they may also be deductible when you pay your taxes.

Maybe it’s the animal shelter around the corner from your home, or perhaps it’s a scholarship fund at your alma mater that does amazing work. Whatever pulls at your heart and makes you feel like you’re doing the right thing can be a good cause for donations. The organization you give your money to benefits. Read on to learn if your contribution could also lower your tax bill.

What Qualifies as Charitable Giving?

In the eyes of the Internal Revenue Service (IRS), a charitable donation is a gift of money, property, or other asset that you give to a qualifying organization, known as a 501(c)(3).

To find out if an organization you’d like to support is eligible to receive tax-deductible contributions, you can search for it on the IRS’s database .

You may want to keep in mind that money or assets given to political campaigns or political parties do not qualify as tax-deductible donations. In fact, no organization that qualifies as a 501(c)(3) can participate in political campaigns or activities.

Organizations that engage in political activities without bias, however, can still sometimes qualify. So, a group can educate about the electoral process and remain within guidelines. They just have to go about it in a nonpartisan way.

Can I Deduct My Year-End Charitable Donation?

Currently, charitable donations could only be deducted by tax filers who itemized their deductions. That means that rather than take the standard deduction on their income tax return, they chose the more complicated path of listing all of their eligible expenses.

How Much of a Charitable Donation Is Tax-Deductible?

The IRS sets limits on how much of a charitable contribution you can deduct from your taxes, and these are frequently updated. The amount is typically expressed in terms of the percentage of your adjusted gross income (AGI) that you may claim.

In 2024, this limit for cash contributions (say, money debited from your checking account) is 60% of a person’s AGI. The top figure is 20%-50% of AGI if you make a non-cash contribution, such as stock shares or a vehicle. The exact figure will vary with both the type of organization to which you are making the donation as well as the kind of item you are donating.

Of course, you are welcome to donate as much as you like. Just keep in mind that any charitable giving above those figures is not eligible for a deduction at tax time.

Tips for Making End-of-Year Donations

To ramp up both the impact and benefit of a charitable donation, here are some strategies you may want to keep in mind:

Making a Timely Donation

Don’t lose track of your timing: The deadline for charitable donations is December 31. If you’re looking to deduct the donation in the current tax year, you will want to make sure your charity has ownership of whatever asset you are donating by the close of business on the 31.

You may also want to make sure that your preferred payment method is accepted by the charity so it doesn’t get kicked back and cause delays. Putting a reminder in your calendar for, say, mid-December can be a good way to make sure you don’t run late with your giving. (Of course, you also want to make sure you don’t miss the tax-filing deadline come April, either.)

Taking Advantage of Company Matching Programs

Your place of employment might have a matching program for charitable giving. They might, for example, match your donation amount dollar for dollar up to a certain amount. If so, it could significantly bump up the amount you could otherwise afford to give.

If you’re unsure about whether your company has a program, it can be worth reaching out to your HR department for further information.

Giving Rewards on Your Credit Card

If you are making a contribution on a budget, you might consider donating credit card rewards you earn, such as hotel points or airline miles. This can be a great way to use points or other rewards that would otherwise just expire. Many credit card companies, hotels, and airlines will make it easy to give your rewards to nonprofit organizations.

Donating Assets from Your Brokerage Account

If you’re looking to lower your taxes, you may want to consider donating assets from your brokerage account to a nonprofit. This may take some time and planning, but the benefits of donating an over-allocated position that’s outperforming can be worth it.

You may be able to receive tax advantages and rebalance your portfolio, while also helping an organization increase its assets.

Recommended: What Tax Bracket Am I In?

Setting up a Recurring Donation

You can get a headstart on next year by creating a recurring contribution now. Many organizations allow you to donate monthly through their websites using a credit card, so you might be able to earn rewards at the same time. By establishing your donation plans now, you won’t have to even think about end-of-the-year giving next year.

Keeping Good Records

If you want to deduct your donation on your taxes, you’ll want to make sure you have the right receipts to back up the transaction.

You’ll want to keep records of your donations. For cash donations under $250, you’ll either need a bank record (like a canceled check or bank statement) or a written acknowledgment from the charity which includes the date and amount of your contribution. (The exception is goods dropped off at, say, a clothing donation bin.)

For cash donations over $250, a bank record isn’t insufficient. Instead, you’ll need something in writing from the charity which includes the date and amount of your donation.

If you are making noncash donations valued at $500 or more, you’ll need to fill out one or more of the IRS Form 8283 . If the donation exceeds $5,000 in value (say, if you gift a car you no longer need to a favorite local organization), you’ll also need to get a written appraisal from a qualified appraiser. In addition, know that donations of $250 or more will also require what is known as a “contemporaneous written acknowledgment.” This is a document that describes the property, states whether the organization provided the donor with goods or services as a result of the contribution,and share an estimate of the value of any such goods or services provided.

Speaking with a Professional

Working with a personal accountant can help answer any questions you may have about how tax laws will impact your tax contribution, as well as help you make the most strategic and efficient charitable donation.

The Takeaway

Giving can be a good idea for a number of reasons. In addition to helping a nonprofit organization meet its operating costs for the year, you can feel good about what you are doing with your money, and you may also benefit from tax deductions.

Giving can also help you get the new year started on the right foot. If you’re looking for other ways to get your financial life in order, consider a new bank account.

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

Should donations be deductible?

Charitable contributions are usually tax-deductible, but there can be limitations as well as exceptions, so it can be wise to inquire in advance. Contributions can often take the form of cash, artwork, cars, and other items of value.

Are charitable contributions no longer tax-deductible?

Charitable contributions can be tax-deductible. However, they must be claimed as itemized deductions; you would do so on Schedule A of IRS Form 1040. Keep in mind that there’s a limit on charitable cash contributions: For 2024, it’s 60% of the taxpayer’s adjusted gross income.

Can you deduct $300 in charitable contributions without itemizing?

The short answer is no. Currently, you must itemize charitable contributions in order to claim them as deductions.

Photo credit: iStock/ThitareeSarmkasat

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.

*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.

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.

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

SOBNK-Q324-060

Oct

2024

Is a SWIFT Code the Same as a Routing Number?

By Timothy Moore | money, Terminology | Comments Off

A SWIFT code, a group of letters and numbers used globally to identify a bank account, is similar to a routing number, but they function differently.

Say you want to transfer money from your bank account to someone else’s: You’ll need to know some basic information about the recipient’s financial institution and their account. This ensures safe and accurate electronic transfers of funds. If you’re conducting a domestic transfer (that is, from one bank account in the United States to another), an ABA routing number will be required. If you are moving funds internationally (sending money to another country from the U.S. or vice-versa), a SWIFT code is typically required.

Key Points

• SWIFT codes and routing numbers are both used to transfer money, but they are not the same: SWIFT codes are used for international transfers, while routing numbers are used for domestic ones.

• SWIFT codes are alphanumeric and identify banks globally, while routing numbers are numeric and used within the U.S.

• The Society for Worldwide Interbank Financial Telecommunications, founded in 1973, oversees SWIFT codes

• The American Bankers Association, established in 1910, manages the use of routing numbers in the U.S.

• Incorrect SWIFT codes or routing numbers can cause transaction failures and potential fees, but in some cases may lead to deposits in the wrong account.

Understanding SWIFT Codes

To send money internationally, you’ll usually need a SWIFT code. Learn more about how this string of letters and numbers usually works.

What Is a Swift Code?

The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a network that allows banks and other financial institutions to electronically communicate with each other securely, across borders. A key part of that involves a SWIFT code, also called a BIC (Business Identifier Code), which identifies a specific bank, with information about the country, location, and, if applicable, branch.

Purpose and Usage of SWIFT Codes

SWIFT codes identify specific details of a bank to ensure international payments are going to the right bank. These codes are comprised of eight to 11 alphanumeric characters:

• The first four characters are letters and represent the name of the bank.

• The next two characters, also letters, indicate the country the bank is located in.

• The next (and sometimes final) two characters can be letters or numbers and indicate where the bank’s main office is located.

• In instances where the bank is large enough to have branches in multiple countries, cities, or regions, there may be a three-digit branch code at the end of the SWIFT code.

If you’re sending an international wire transfer from the United States, you’ll usually need to know the recipient’s SWIFT code. There are a number of countries that do not participate in SWIFT, but generally speaking, SWIFT is the global standard for international payments.

Understanding Routing Number

To send money domestically in the United States, you’ll usually need a routing number. Here’s important information about what these series of digits are and how they function.

What Is a Routing Number?

A routing number is a nine-digit code composed of numbers that are used to identify banks and credit unions within the United States during domestic transfers.

These codes have been around for more than a century. The American Bankers Association (ABA) started to link routing numbers to financial institutions in 1910 as a unique identifier.

Purpose and Usage of Routing Numbers

Like a SWIFT code, a routing number helps direct money transfers to the right financial institution. You’ll also need the recipient’s bank account number to successfully move the funds.

You might think of the routing number like a street name for your bank account (Main or Church Street, say), but your bank account number is the actual numeric portion of your address (to continue the analogy, this would specifically identify a house), to ensure money goes to the right “home” on that “street.”

(It’s worth noting that Canada also uses routing numbers, but not ABA routing numbers. Instead, Canada’s eight- or nine-digit routing numbers include a three-digit institution number and a five-digit transit number, and possibly a zero.)

ACH transfers and wire transfers require knowing the recipient’s bank account and routing number. And you’ll frequently need to know your own routing number for several common transactions, such as:

• Online bill and tax payments

• Payment app setup

• Direct deposit setup

There are some ways to send money to another person in the United States without needing to know their routing number. For instance, you can write and mail a check, you can send a money order, and you can use a peer-to-peer (P2P) transfer app to send money to someone in the U.S. without needing to know their routing number.

Differences Between SWIFT Codes and Routing Numbers

While they serve a similar purpose in electronic funds transfers, there are some key differences when comparing SWIFT codes vs. routing numbers.

Domestic vs. International Transactions

In the U.S., you’ll use routing numbers for domestic transfers. For international transactions, you’ll need to know the recipient’s SWIFT code. U.S. banks typically have a SWIFT code for such situations that is specific to each branch. (Some smaller banks and credit unions may not, however, have SWIFT codes.)

Code Structure and Format

Routing numbers are nine characters, all digits. SWIFT codes are alphanumeric and are typically between eight and 11 characters long.

Issuing Authorities

The Society for Worldwide Interbank Financial Telecommunications oversees SWIFT codes and was founded in 1973. The American Bankers Association manages routing numbers in the U.S. and was established much earlier — in 1910.

When To Use SWIFT Codes and Routing Numbers

If you are wiring money internationally, you’ll need to know a recipient’s SWIFT code. (There are a number of countries that do not use SWIFT codes, in which case you’ll need to find an alternate way to identify their bank during an electronic transfer or move money using another method.) Similarly, if someone is wiring money from another country to you in the U.S., you’ll need to provide them with your bank’s SWIFT code.

If you’re transferring money to someone else domestically in the United States, you’ll instead need to know their bank’s routing number. You’ll also need your own routing number when transferring funds, as well as setting up direct deposit, online payments, and other forms of digital transfers and payments.

Locating SWIFT Codes and Routing Numbers

You can typically find your SWIFT code on a bank statement or on your bank’s website or app. Call customer service for your bank if you’re unable to locate it.

Your routing number is also easy to find online or via mobile app when you log into your account. The routing number is also printed on your paper checks. Typically, it is the first set of numbers at the lower left corner of a check.

The Takeaway

SWIFT codes and routing numbers serve the same basic purpose of helping to identify banks when transferring money electronically, but they are used for different kinds of transfers. Domestic transfers in the U.S. rely on routing numbers while international transfers typically need SWIFT codes.

Are you in need of a bank account to begin sending and receiving money? See what SoFi offers.

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

FAQ

Can a SWIFT code be used for domestic transactions?

In the U.S., SWIFT codes are not used for domestic transactions. Instead, you’ll need to know your bank account number and routing number, as well as the bank account and routing number of the person to whom you are wiring money. Or, if someone is transferring funds to you, they will need your identifying information, including your bank account number and routing number.

Are SWIFT codes and routing numbers interchangeable?

When considering SWIFT codes vs. routing numbers, it’s important to recognize that they are not interchangeable. They’re issued by different authorities, have a different number of characters, and are used for different purposes. While similar, routing numbers are for domestic transfers, and SWIFT codes are for international transfers.

What happens if I use the wrong SWIFT code or routing number?

If you use the wrong SWIFT code or routing number for a wire transfer, the transaction will typically fail, and the payment will be returned to you. In some cases, you might have to pay a fee (including if you resubmit the transaction), and it’s possible money could be routed to the wrong account. For this reason, it’s important to verify that you have the correct SWIFT or routing number when transferring funds.

Photo credit: iStock/jjlim80

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.

*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.

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.

SOBNK-Q324-073

Sep

2024

What Do You Need to Open a Bank Account?

By Walecia Konrad | Budgeting & Goals, Going to College, money | Comments Off

Often the hub of a person’s financial life, bank accounts can be quick and simple to open with the right materials in hand, including a valid government-issued photo ID, personal information such as your Social Security number (SSN), and perhaps an opening deposit.

Here, learn the details on what you need to open a bank account and how to navigate the process itself.

Key Points

• Opening a bank account typically requires a valid government-issued photo ID, personal information such as your age and Social Security number, and possibly an initial deposit.

• Joint account applications require personal and identifying information for all account owners.

• How you open a bank account may vary slightly depending on the bank’s criteria, such as whether a minor needs an adult co-owner to be on the account.

• After opening a bank account, you may be able to utilize features like online bill pay, account alerts, and linking accounts to manage finances effectively.

• The process for opening a bank account online and in-person are similar, though the deposit methods, if required, may differ.

What You Need to Open a Bank Account

Here’s a list of what you are likely to need when opening a bank account. Gathering these materials before you actually begin the process of starting a new account can help you save time and frustration.

1. Qualifying information: First, you’ll need to make sure you’re eligible to open a bank account. If you’re under 18, many (but not all) banks may require a parent or legal guardian to open the account with you.

2. Identification: You’ll also need to provide a valid government-issued photo ID such as a driver’s license, non-driver state ID card, or passport.

3. Personal information: Be prepared to provide basic information such as your birthdate and SSN. You’ll also need to give contact information such as your address, phone number, and email. You might be required to submit proof of residency, such as a utility bill.

◦ If you’re opening a joint account: You’ll need the identifying and personal information listed above for all the account owners. If you are doing this in person at a bank branch, you may not need the other person present.

4. Initial deposit: In many instances, you’ll need an initial deposit when opening a bank account. The minimum amount required to open an account varies from bank to bank but is often between $25 and $100. In some cases, it can be absolutely zero. If you’re transferring the minimum deposit from another bank, you will likely need the routing and account numbers.

5. Username and password: If you’re applying online or opening a checking or savings account at an online-only bank, you’ll need to establish a username and password.

6. Signatures: If you are applying for an account in person at a branch, you’ll likely be able to sign all documents there. If you’re applying online, you may be able to use an e-signature, or, depending on the bank, you may have to wait and sign documents that are sent to you via the mail in order to access full privileges.

How to Open a Bank Account

With these materials in hand, it can be quite simple to open a bank account. Here are the typical steps involved.

Decide What Kind of Account and Which Bank Is Best for You

First, determine if you want to open a checking or savings account (learn more about the differences below) or both; most people have at least one of each.

Then, you can review various bank options. For instance:

• You might decide to go with an online bank because of the convenience and the higher interest rates they may offer.

• You might prefer a traditional bank, with a nearby branch, where you can regularly meet with the team in person.

• You might like to bank at a credit union that you can become a member of based on, say, your profession.

Shop around a bit, and compare features to find the best fit.

Gather Your Documentation

As noted above, whether you are applying online or in person, you will need to have a few documents on hand, including government-issued photo ID and your SSN.

Fill out the Application

Whether in person or online, you will want to make sure to fill this out carefully, double-checking the information to make sure it’s accurate.

Pay an Opening Deposit if Required

You may or may not need to pay a deposit to get your account up and running. (If you are opening an account online and an opening deposit is required, you can typically do an electronic funds transfer.)

Many banks look for $25 to $100 as an opening deposit, but some — especially for checking accounts — may allow you to open an account without any cash.

Start Using Your Account

Depending on the kind of bank account you are opening (checking vs. savings; at a traditional or an online bank), you may need to wait to get a debit card, checks, and other materials. However, you should be able to use your account right away for at least some functions, such as setting up direct deposit and making electronic payments.

Bank Account Types to Choose From

There are two main types of basic bank accounts: checking and savings accounts. Many people choose to open multiple types of bank accounts at the same time.

Type of Account	Pros	Cons
Checking Account	Easy access to money Unlimited withdrawals/transfers Low initial deposit; typically, $25-100 but possibly $0 Insured by the Federal Deposit Insurance Corporation (FDIC) Debit card ATM privileges Direct deposit	No or low interest rate Possible minimum balance required May charge overdraft and nonsufficient funds fees
Savings Account	Earns interest Typically easy access to money ATM privileges Low initial deposit of $25 to $100 FDIC-insured	Traditional savings may have low annual percentage yields (APYs) Some account restrictions (such as limited monthly withdrawals) may apply May charge fees

In a nutshell:

• If you’re looking for a bank account to use primarily for paying expenses, a checking account with no or low fees is probably best. You can get to your money using checks, ATMs, electronic debits, and debit cards tied to the account. You can deposit using ATMs, direct deposit, electronic transactions, and over-the-counter deposits.

• If you are trying to save for short-term financial goals such as a car, vacation, or down payment on a home, a savings account may fit your needs. Savings account interest rates vary, with the amount of interest paid often being quite modest at traditional banks and potentially higher at online banks. There may be limits on how many transactions you can make in a given time period.

A couple of notes regarding bank accounts:

• Any interest earned on a savings or checking account is considered taxable income and will be reported to the Internal Revenue Service (IRS).

• It’s wise to check with banks to see what the minimum deposit and balance requirements are and what kinds of fees are applied to accounts to make sure there aren’t hidden costs lurking.

Using Your New Bank Account

Now that you know what you need to open a bank account and how to start one, here’s some advice on how to use your new savings or checking account. (Remember to keep an eye out for anything coming to you in the mail, such as a debit card or paper checks.)

• Utilize online features: You’ll likely want to sign up for any electronic features associated with your account that may help you manage your money. This includes online bill pay, which allows you to pay bills electronically, eliminate paper checks, and take advantage of remote check deposits. Account alerts are another benefit of electronic bank accounts, as they can warn you about unusual activity in your account and if your balance is getting low.

• Track activity: It’s a wise move to keep close track of the activity in your checking account to make sure you don’t overdraw. Most banks charge hefty overdraft fees for purchases that put the account in the red. Those fees can add up fast.

• Consider linking accounts: If you’ve opened both a savings and checking account, you may want to consider linking the two. This way, you may be able to avoid overdraft charges and have a place to put any extra money from your checking account into a more lucrative, interest-bearing account.

As you see, starting to use a bank account takes just a little bit of time and effort. Getting up and running can be an important step towards putting your money to work for you and optimizing your financial life.

The Takeaway

Opening a bank account is usually quite simple. Typically, you’ll need personal information, government-issued photo ID, and an opening deposit to open a bank account. You might choose to open a checking or savings account or, if you’re like most Americans, both kinds of accounts. Once your bank account or accounts are established, you can enjoy a variety of conveniences and features that can help you manage your money better.

Looking for one-stop banking? See what SoFi offers.

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 much money do you need to open a bank account?

You will often need an initial deposit to open your checking account or your savings account. For checking and savings accounts, this can be as low as $25 or $100, depending on the bank and the account services you’ve signed up for. In some cases, though, a bank (usually an online bank) may let you open a checking account with no money until your first paycheck or other amount of money is deposited.

Are the requirements to open a bank account online any different?

The requirements for opening a bank account online vs. in person are similar if not the same, generally requiring personal information and ID documents. Worth noting: You might open a bank account in person with cash. However, with an online bank account, you would probably need to make an electronic transfer or set up direct deposit.

What ID do you need to open a bank account?

You will typically need a government-issued photo ID to open a bank account. Usually, this means a driver’s license, a non-driver’s ID card, or a valid passport.

Photo credit: iStock/atakan

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.

*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.

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

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-Q324-091

Sep

2024

Active vs Passive Income: What's the Difference?

Active Income vs Passive Income

By Timothy Moore | Growing Wealth, Life & Career, money | Comments Off

Income is money earned, plain and simple, right? While that statement is true, it doesn’t tell the full story. If you look more closely, you’ll learn that there are two kinds of income — active income and passive income.

Active income is money you make by actively participating in work, and generally comes in the form of salary, wages, commissions, and tips. Passive income, on the other hand, is money that you earn without active participation. Examples might be money generated by investments, a rental property you own, or a YouTube account you started but haven’t updated.

While passive income may sound like the better deal, both types of income are important. Read on for a closer look at the differences between active and passive income, including potential earnings, tax implications, and how they can impact your lifestyle.

Key Points

• Active income is the income you actively work for, such as through jobs, freelance work, gig work, commissions, and bonuses.

• Passive income, after it’s initially established, requires minimal ongoing effort and may come from investments, rental properties, royalties, and automated online businesses.

• Active income tends to be more predictable and secure but limited by time and effort, while passive income may grow over time.

• Active and passive income may be taxed differently, with active income typically taxed as ordinary income and passive income, in certain cases, taxed at lower rates.

• Combining active and passive income may boost financial security, improve work-life balance, and help you meet financial goals.

What Is Active Income?

Active income is the income you actively work for, such as a salary or hourly wage, and is the most traditional form of earning money. This type of income requires continuous effort, meaning you need to trade your time and labor for money.

Active income is typically tied to a specific time commitment, such as working 9-to-5. The amount of active income you earn also tends to be directly related to the amount of work you complete. Once you stop working, the income stops too.

With enough active income, you may be able to invest in something that generates passive income down the road (more on that below).

Recommended: What Is Residual Income?

Examples of Active Income

Active income can come from a number of different sources. Here’s a look at the some of the many ways you can earn active income.

• Your job: One of the most common ways to earn active income is through salaried employment. Whether you receive a fixed salary or an hourly wage in exchange for your work, your income is directly tied to the time and effort you put into your job.

• Freelance work: Since you are providing a service in exchange for pay, freelancing is considered a form of active income. Whether you’re a writer, graphic designer, programmer, or do any other type of contract work, you earn money only when you complete specific tasks or projects.

• Gig work: Taking on a side hustle like driving for a rideshare or food delivery service, or any other involvement in the gig economy, qualifies as active income.

• Commissions: Many professionals involved in sales earn active income through commissions. This type of income depends on performance, where you earn money based on sales or completed deals.

• Bonuses: Some jobs offer bonuses in addition to a regular salary. These bonuses are often tied to performance metrics and are considered active income since they require achieving specific goals.

Recommended: 33 Ways to Make Money From Home

What Is Passive Income?

Passive income refers to money you earn with minimal effort or direct involvement after an initial setup. Unlike active income, which requires continuous labor, passive income flows regularly without the need to trade time for money on a daily basis. Passive income can come from investments, royalties, or business ventures where you’re not involved in the daily operations.

While passive income often requires upfront work or capital investment, the idea is that the income will continue to flow with little or no day-to-day labor. This type of income is appealing because it can help you build wealth and financial security over time.

Examples of Passive Income

Like active income, there are a number of ways to earn passive income. Here are some of the most common sources of passive income.

• Dividend stocks: Dividend-paying stocks offer a way to earn passive income by investing in shares of companies that distribute part of their profits to shareholders. Investors receive regular dividends without needing to manage the company.

• Bank interest: When you deposit your money into a savings account, you earn interest just by letting it sit there — the ultimate form of passive income. The higher the interest rate, the more you can earn. High-yield savings accounts offered by online banks typically generate more passive income than traditional savings accounts.

• Rental Income: Owning real estate and renting it out is a popular form of passive income. Once the property is rented, the owner collects monthly rent without much day-to-day involvement, especially if they hire a property management company.

• Royalties from intellectual property: Authors, musicians, and inventors can earn royalties from their intellectual property. Once a piece of work is published or a patent is licensed, the creator can receive passive income from each sale or usage.

• Automated online businesses: E-commerce stores that use drop shipping or automated sales systems can generate passive income. Once the system is set up, little involvement is required to maintain the flow of revenue.

Recommended: 12 Ways to Make Money on YouTube

Active vs Passive Income: What’s the Difference?

Active and passive income serve different purposes and offer distinct advantages and disadvantages. Here’s a look at some of the key differences.

Potential Yearly Income Made

Active income is generally more dependable and predictable, especially if it’s from a salaried or hourly job with a set number of weekly hours. However, the potential for active income often depends on how much time and effort you can dedicate. The ceiling for active income may also be capped by your line of work and industry standards.

Passive income, by contrast, can be hard to predict and is generally less dependable, since it may be susceptible to market volatility and other external factors. However, the potential for income can be higher, since earnings aren’t limited by how much you can work. Once established, a source of passive income can continue to generate money indefinitely and potentially provide a significant annual income stream.

How These Are Taxed

Active income and passive income are taxed differently by the internal revenue service (IRS). Wages, salaries, and commissions are all taxed as ordinary income, meaning they fall under the standard federal and state income tax brackets.

The tax rate on passive income, however, can vary, depending on how it is earned. For instance, long-term capital gains (from selling investments held for more than a year) and qualified dividends are generally taxed at lower rates than ordinary income. However, rental income, interest payments, and royalties may be taxed at ordinary rates.

Since this is a complicated area of tax law, it’s a good idea to work with a licensed tax professional when managing taxes for passive income streams.

How These Incomes Affect Lifestyle

Active income requires that you regularly work to generate money. People who rely solely on active income are typically bound to a fixed schedule, which can limit flexibility and put limits on leisure time.

Because passive income requires minimal (or no) participation, it can lead to a more flexible lifestyle. However, this assumes you have enough passive income flowing in each month to pay your bills and other expenses. If that’s the case, you might be able to travel more freely, focus on volunteer work, or spend time pursuing personal passions. Or, passive income might supplement your full-time active work, allowing you to save more for retirement or meet other financial goals.

The Takeaway

Many people rely on active income, which requires active, ongoing participation in the workforce and related to how much time you can dedicate to working. Passive income, by contrast, provides the opportunity for ongoing earnings with minimal effort after the initial setup.

While active income is generally more predictable and secure, passive income can help you build financial security over time and improve your work-life balance. Even if active income is your main source of income, generating some degree of passive income can boost your emergency savings and help you meet your short- and long-term financial goals.

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 are the pros and cons of active and passive income?

Active income provides immediate, predictable earnings but requires continuous work. A key benefit of this type of income is a dependable paycheck, but it’s limited by your available time and energy. If you stop working, the income stops too.

Passive income, once established, requires minimal ongoing effort. The downside is that it often takes time, capital, or initial effort to set up, and the income may be less predictable at first. Over time, however, it can grow and supplement active income without any increase in daily labor.

Do all people need to have passive income?

You do not need passive income, especially if you’re content with your career earnings and you’re building savings for the future. That said, having passive income can be beneficial. After the initial setup, passive income allows you to earn money without much additional effort. Passive income can supplement active income and allow for more flexibility and financial freedom.

Can you live solely off of passive income?

Yes, living solely off passive income is possible, but reaching this goal often involves years of saving, investing, and cultivating sources of passive income. Many people strive for this through financial planning and investments that eventually generate enough income to cover living expenses.

Is active income better than passive income?

Both active and passive income have pros and cons. Active income requires ongoing work but can mean a steady paycheck. Passive income typically requires an initial investment of time and money and may be less dependable than active income. Once established, however, passive income can then keep cash flowing your way without ongoing work. Ideally, you want to have both active and passive income.

Photo credit: iStock/Adrian Vidal

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.

*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.

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.

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-Q324-089

Sep

2024

What Is Neobanking and How Does It Work?

By Timothy Moore | money | Comments Off

Neobanks are online-only financial technology (“fintech”) companies that offer traditional banking services in a digital-first format. Though they are called neobanks, these fintechs are not actually banks. They are able to provide online banking services only by partnering with an established bank. Read on for a closer look at how neobanks work, how they make money, and the pros and cons of using a neobank vs. a traditional or online bank.

What Is a Neobank?

A neobank, also sometimes referred to as a “challenger bank,” is a fintech that offers traditional banking services through a digital platform, usually online and via a mobile app. Neobanks typically do not operate physical locations or branches, meaning they’re a digital-only experience. This lack of physical branches means their overhead is lower — which may allow them to offer higher annual percentage yields (APYs) on bank accounts and charge low (or no) banking fees.

The big caveat with neobanks: They aren’t banks at all. Instead, they offer access to banking services and products that are overseen by true, federally regulated and insured banking institutions.

Recommended: Is Mobile Banking Safe?

How Do Neobanks Work?

Because of their digital-first strategy, neobanks are able to keep costs low and pass those savings on to consumers. Often, neobanks target their services at those who are frustrated with the traditional banking experience — those who may not qualify for a traditional credit card or loan, or who have been burned by a mountain of fees on past checking accounts.

Tech-savvy users are often drawn to the advanced apps and platforms of neobanks in the same way they’ve been drawn to other digital disruptors, like Uber and Lyft in the rideshare space and Airbnb and VRBO in the lodging space.

Here’s an important distinction to note when thinking about what a neobank is: Just because a bank operates online doesn’t mean it’s a neobank. There are many online banks that are licensed banks and directly offer FDIC insurance on deposit accounts. They typically provide an easy-to-use digital app and a full suite of banking services, and should not be considered neobanks.

But as we’ve pointed out, neobanks are not actually banks. So what does that mean?

• While you can access traditional banking features like checking accounts and high-yield savings accounts through a neobank’s online platform and mobile app, the neobank typically partners with larger traditional banks to offer those services.

• Notably, neobanks do not typically offer a full suite of services, such as loans and investments, that full-fledged banks do.

• Neobanks exist in a regulatory gray area. Many offer FDIC insurance through their partner banks, but the neobanks themselves do not answer to a primary regulator. The Consumer Financial Protection Bureau (CFPB), however, recently announced that it will enact stricter supervision of nonbank fintechs going forward. And in recent years, the CFPB and state regulators have investigated certain neobanks for isolated events.

That said, a neobank must typically comply with its partner bank’s own standards and practices, dictated by federal and state regulation. Thus, indirectly, neobanks may face some regulation.

Pro Tip: While many neobanks offer consumers FDIC insurance through the banks with which they partner, it’s always a good idea to read the fine print before opening a deposit account to make sure it offers insurance. While bank failures are rare, that insurance can provide real peace of mind.

How Do Neobanks Make Money?

While each neobank is unique and likely to have its own varied revenue streams, these challenger banks commonly make money through merchant fees from debit and credit card purchases. Such fees are also called “interchange fees.” Consumers don’t pay these fees; instead, businesses bear the burden.

Neobanks that offer credit cards and/or loans also make money on interest they charge borrowers.

Pros and Cons of Neobanks

Neobanks may make sense for some consumers, but they’re not for everybody. Before opening an account, it’s a good idea to weigh the pros and cons:

Pros	Cons
Lower fees	Less regulated (not chartered with state or federal regulators)
Higher interest rates on deposit accounts	May not offer FDIC insurance
May offer credit card without credit check	May not offer a full suite of banking services (mortgages, auto loans, etc.)
Easy-to-use mobile app (mobile check deposit, peer-to-peer payments, etc.)	Typically no brick-and-mortar branches
24/7 account access — and on the go	Untested in the market (no long history of success to instill confidence in consumers)

Examples of Neobanks

In the last decade-plus, the fintech market has been teeming with myriad newcomers. Here are some examples of popular neobanks, whose names you may recognize:

• Chime

• GoBank

• Aspiration

• Current

Recommended: How to Manage a Checking Account

Neobanks vs Traditional Banks

So how do neobanks compare to traditional banks? The table below breaks down common differences, but remember: Each bank (or neobank) is different and offers varying levels of services, rates, and fees. These are broad generalizations and may not apply to every financial institution.

	Neobanks	Traditional banks
Fees	May offer lower and fewer fees	May charge higher and more fees
Interest on deposits	May have higher interest rates on deposit accounts	May have lower interest rates on deposit accounts
Offerings	Typically offer checking and savings accounts; may offer a credit card	Typically offer multiple checking and savings accounts, as well as credit cards, personal loans, home loans, auto loans, and mortgages; may offer investment and retirement accounts
Mobile app/online banking	Typically have high-rated mobile app and online banking platforms	May lag in app and online quality compared to neobanks
Physical location	Typically do not have physical locations	Typically have physical locations
Insurance	May offer FDIC insurance through a larger bank	Typically carry FDIC insurance (or NCUA insurance for credit unions)
Regulation	May not be regulated	Typically chartered and regulated

What About Online Banks?

The previous table does not capture all the nuances of online banks. The differences between online banking and neobanking were briefly noted above. However, it’s worth taking a closer look at how online banks compare to traditional brick-and-mortar ones. While they may offer the same breadth of products, online banks typically offer better rates and lower fees than traditional banks. Online banks also usually offer leading-edge mobile apps as well as FDIC insurance.

Online banks can afford to pay those higher interest rates and charge lower fees because, unlike traditional banks, they don’t have to pay for physical locations and on-premises staff. They can then pass some of those savings on to their customers.

Wondering if an online bank is right for you? Do your research on the pros and cons of online banking before making your decision.

The Takeaway

Neobanks may be appealing to tech-savvy consumers who want high interest rates on their savings accounts, low fees, and easy-to-use apps. Traditional banks, however, may offer more stability and are formally regulated. The convenience of in-person banking and the full suite of banking services offered by traditional brick-and-mortar banks can also be appealing.

In some ways, online banks offer the best of both worlds — they are licensed as banks and have FDIC insurance directly, but also typically offer higher-than-average APYs, lower (or no) fees, and state-of-the-art banking platforms and apps.

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’s the difference between a traditional bank and a neobank?

Traditional banks usually offer in-person branches, are licensed as banks, and offer FDIC insurance directly. They typically offer a full suite of banking services, including loans. Many neobanks are more narrowly limited to checking and savings accounts delivered digitally only. However, they often offer more competitive interest rates and lower fees.

Are neobanks regulated like regular banks?

Neobanks do not face the same regulation as regular banks simply because they are not charted as banks with federal and state regulators. Instead, neobanks often partner with chartered banks. That said, the Consumer Financial Protection Bureau has announced that it will increasingly supervise and regulate the activity of neobanks.

Is your money FDIC-insured with a neobank?

Some neobanks offer their banking services through chartered financial institutions. Through those institutions, the neobanks may be able to offer FDIC insurance for their accounts and services, but some don’t. It’s therefore a good idea to read the fine print of a neobank before opening an account so you know where you stand.

Photo credit: iStock/Prostock-Studio

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.

*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.

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.

SOBNK-Q324-067

Tax-Deductible or Not? Your Guide to End-of-Year Donations

What Qualifies as Charitable Giving?

Can I Deduct My Year-End Charitable Donation?

Get up to $300 when you bank with SoFi.

How Much of a Charitable Donation Is Tax-Deductible?

Tips for Making End-of-Year Donations

Making a Timely Donation

Taking Advantage of Company Matching Programs

Giving Rewards on Your Credit Card

Donating Assets from Your Brokerage Account

Setting up a Recurring Donation

Keeping Good Records

Speaking with a Professional

The Takeaway

FAQ

Should donations be deductible?

Are charitable contributions no longer tax-deductible?

Can you deduct $300 in charitable contributions without itemizing?

Is a SWIFT Code the Same as a Routing Number?

Understanding SWIFT Codes

What Is a Swift Code?

Purpose and Usage of SWIFT Codes

Get up to $300 when you bank with SoFi.

Understanding Routing Number

What Is a Routing Number?

Purpose and Usage of Routing Numbers

Differences Between SWIFT Codes and Routing Numbers

Domestic vs. International Transactions

Code Structure and Format

Issuing Authorities

When To Use SWIFT Codes and Routing Numbers

Locating SWIFT Codes and Routing Numbers

The Takeaway

FAQ

Can a SWIFT code be used for domestic transactions?

Are SWIFT codes and routing numbers interchangeable?

What happens if I use the wrong SWIFT code or routing number?

What Do You Need to Open a Bank Account?

What You Need to Open a Bank Account

Get up to $300 when you bank with SoFi.

How to Open a Bank Account

Decide What Kind of Account and Which Bank Is Best for You

Gather Your Documentation

Fill out the Application

Pay an Opening Deposit if Required

Start Using Your Account

Bank Account Types to Choose From

Using Your New Bank Account

The Takeaway

FAQ

How much money do you need to open a bank account?

Are the requirements to open a bank account online any different?

What ID do you need to open a bank account?

Active Income vs Passive Income

What Is Active Income?

Examples of Active Income

Get up to $300 when you bank with SoFi.

What Is Passive Income?

Examples of Passive Income

Active vs Passive Income: What’s the Difference?

Potential Yearly Income Made

How These Are Taxed

How These Incomes Affect Lifestyle

The Takeaway

FAQ

What are the pros and cons of active and passive income?

Do all people need to have passive income?

Can you live solely off of passive income?

Is active income better than passive income?

What Is Neobanking and How Does It Work?

What Is a Neobank?

How Do Neobanks Work?

How Do Neobanks Make Money?

Get up to $300 when you bank with SoFi.

Pros and Cons of Neobanks

Examples of Neobanks

Neobanks vs Traditional Banks

What About Online Banks?

The Takeaway

FAQ

Student Loan
Refinancing

Personal
Loans

Online
Investments