In some cases, the IRS (Internal Revenue Service) does consider credit card rewards taxable income and in some cases, they don’t tax earned rewards. Confused? Don’t worry: Read on to learn when credit card rewards are taxable income and when they aren’t.
What Are Credit Card Rewards?
To better understand how credit card rewards are taxed, it can help to know what credit card rewards are. When a consumer uses a credit card they may earn different credit card rewards, such as points, cash back, and airline miles.
Depending on their redemption value, these rewards can be worth up to hundreds if not thousands of dollars. Your cardholder agreement should outline the credit card rules for how to earn rewards using a specific credit card, as well as how to redeem them.
How the IRS Treats Credit Card Rewards
In some cases, credit card rewards are taxable; in other cases, no. Take a closer look at which types of rewards and in which scenarios credit card rewards are counted as taxable income by the IRS.
Rewards Treated as Rebates on Spending
Luckily, cash back rewards and other rewards like miles or points aren’t considered taxable income when earned by making purchases. The IRS considers these types of rewards as rebates, discounts, or bonuses rather than income.
The trick is that the cardholder has to spend a certain amount to earn a reward in order for the IRS to not classify the rewards as income. For example, if a new credit card offers $200 in cash back when the cardholder spends $2,000 within the first six months of opening their account, that $200 would not be considered taxable income.
Rewards Considered as Income
Certain rewards are considered income. The way to identify which rewards are taxable income is by looking at how they’re earned.
As mentioned previously, if someone spends money to earn rewards, those rewards won’t be taxed. If, however, someone is given a $150 gift card simply for signing up or referring a friend for a new credit card, that $150 is viewed as taxable income — because they didn’t spend any money to earn it.
When Are Credit Card Rewards Taxed?
Again, credit card rewards that aren’t earned through spending (such as some introductory bonuses) can count as income that the IRS will expect the cardholder to pay income taxes on. Some scenarios in which credit card rewards may get taxed include:
• If you received a sign-up bonus simply for opening a credit card or account
• If you earn a reward for referring a friend
When Your Credit Card Rewards Are Taxable
As briefly mentioned above, any monetary rewards that a cardholder didn’t earn through spending can be considered taxable income.
Let’s look at how this can work with two different credit card bonus offers. If a cardholder is offered $100 if they spend $1,500 in the first three months of having their account open and they spend enough to earn that bonus, that reward won’t count as taxable income. On the other hand, if a cardholder is offered a $100 gift card simply for opening their new account, they will need to pay income tax on the $100.
When Your Credit Card Rewards Are Not Taxable
As briefly mentioned above, credit card rewards aren’t considered taxable income if someone spends money to earn them. When a cardholder acquires the rewards (cash back, travel miles, etc.) through purchases, then those rewards are classified as a rebate or a bonus, not taxable income.
For instance, this may include:
• Sign-up bonuses that require meeting a spending threshold
• Rewards earned from credit card spending
• Miles earned through travel
Are Business Credit Card Rewards Taxable?
It doesn’t matter if the rewards are earned with a personal credit card or a business credit card — the same rules surrounding income taxes apply.
Where business credit cards can affect taxes is when it comes time to take tax deductions. For example, if someone bought $2,000 worth of equipment for their business and earned $40 in cash back rewards doing so, they can only deduct $1,960 on their taxes. In other words, they can only deduct the net cost of business expenses, which cash back reduces.
How to Know If You Owe Taxes on Credit Card Rewards
It can be hard to keep track of how much taxes are owed on credit card rewards. If someone earns a bonus without having to meet a spending requirement, the credit card company might send the cardholder an IRS Form 1099: either a Form 1099-INT or Form 1099-MISC specifying the amount of income they earned.
Whether or not you receive this form, however, you’ll need to report the bonus on your income taxes. To make doing this easier, it can be helpful to keep track of any bonuses not earned through spending. That way, if the credit card issuer doesn’t send a Form 1099-INT or Form 1099-MISC, you can still complete your taxes properly.
Reviewing old statements to look for statement credits in the form of cash back or other types of rewards can be helpful.
Avoiding Taxes on Your Credit Card Rewards: What to Know
To avoid taxes on credit card rewards, all the cardholder has to do is not seek out credit cards that offer bonuses for simply signing up for the credit card. If the rewards are earned through spending, they won’t run into any taxes, thus allowing them to pay less tax.
The Takeaway
In general, taxes only apply to rewards that don’t require any spending to earn. If you’ll owe taxes on your rewards, the credit card issuer typically will send a Form 1099-INT or Form 1099-MISC specifying the amount of income you’ve earned and will need to report.
Being smart about credit cards and their usage is about more than just rewards, however.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
Are credit card cash back rewards taxable?
Only credit card rewards that cardholders receive without having to spend money to earn them in any way are considered taxable income. If a cardholder earns cash back for spending money using their credit card, it won’t count as taxable income.
Are loyalty points taxable?
If someone spends money to earn loyalty points (such as purchasing airline tickets), they won’t have to pay taxes on those points. If, however, they received the points simply for signing up for a credit card, that would count as taxable income that they’ll need to report.
Are credit card rewards reported to the IRS?
In some cases, yes, credit card rewards are reported to the IRS. When this happens, the credit card company might send the cardholder a Form 1099-INT or Form 1099-MISC specifying the amount of income they earned that they’ll need to report.
Do you have to pay taxes on credit card rewards?
Cardholders need to pay income taxes on credit card rewards they didn’t need to spend money to earn. If they had to spend money to earn a reward, such as cash back, that won’t count as taxable income.
About the author
Jacqueline DeMarco
Jacqueline DeMarco is a freelance writer who specializes in financial topics. Her first job out of college was in the financial industry, and it was there she gained a passion for helping others understand tricky financial topics. Read full bio.
Photo credit: iStock/Grayscale Studio
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.
Overall, ATMs (automatic teller machines) can be a safe way to access money en route to a cash-only restaurant, say, or to conduct other banking transactions. But that doesn’t mean that theft, fraud, or other issues never crop up. They can and sometimes do.
That’s why it’s important to practice safe habits when using ATMs. Learn the ground rules here.
Key Points
• ATMs offer convenient cash access but require caution to avoid theft and fraud.
• Use ATMs in well-lit, busy areas; cover the keypad when entering your PIN.
• Card skimming is a risk; ATMs inside banks may help you avoid this issue vs. outdoor ATMs.
• Verify receipts and account balances to catch transaction errors.
• Avoid ATMs late at night or in isolated areas to reduce robbery risk.
What Are the Pros of Using ATMs?
ATMs can really come in handy in a pinch. For example, if someone is heading to a tag sale or farmer’s market, there’s often an ATM on the way where they can take out some cash.
Here’s a closer look at why people use ATMs and what their advantages are:
• Easy to locate; accessible in banks, stores, airports, and other locations
• Make cash accessible when going to the bank isn’t possible
As helpful as ATMs can be, people do look to take advantage of consumers using these machines. Unfortunately, ATM fraud and theft is common enough that consumers need to approach these devices with a measure of caution.
These are some of the risks associated with using ATMs that consumers need to be aware of to ensure their safety and financial wellbeing:
• Fraudsters can attach a card skimmer (thin plastic devices that slip over the card slot) to an ATM that collects debit card information, which can lead to financial loss.
• Errors can occur such as deposits being counted incorrectly or checks being read wrong, which can cause problems with bank accounts.
• Power outages in the midst of a transaction can make technical glitches occur and deposits not register.
• ATMs can dispense too much money, which may seem like a money windfall for the user, but can result in legal trouble if the consumer fails to report the error.
• Because thieves know the person using the ATM has the ability to access cash quickly, this can make them a target for robbers (especially late at night or at locations without much foot traffic).
• It’s possible to hit an ATM withdrawal limit or to overdraft, which can lead to fees and other issues with your financial institution.
It’s wise to keep these downsides in mind so you can take steps to avoid them.
Get up to $300 when you bank with SoFi.
No account or overdraft fees. No minimum balance.
Up to 3.80% APY on savings balances.
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Keeping Yourself Safe While Using an ATM
To stay safe when using an ATM, consumers can practice these habits to protect their financial health:
• Use ATMs within bank branches, where card skimmers are much less likely to be found.
• Cover the keypad when entering a PIN to block anyone from seeing the code.
• Scope out any ATMs that aren’t inside a bank before use to see if there are any misaligned card readers or other signs of tampering.
• Always try to use ATMs during the day or in well-lit and trafficked locations.
• Visit ATMs with another person or when other people are around, which can reduce the likelihood of being a robbery target.
• Using these devices can result in ATM fees, which can add up and harm someone’s budget.
• Do a cardless withdrawal, which relies on mobile phone technology instead of a debit card. This means you’re not vulnerable to card skimming.
These steps can help you keep yourself and your money safe when using an ATM.
Are ATMs Safe From Being Hacked?
The practice of card skimming is a principal reason why some consumers wonder if ATM machines are safe from hacking. As briefly noted earlier, ATM machines can have card skimmers attached to them. These devices collect debit card information and can allow fraudsters to access the associated bank account. Unfortunately, skimmers can be quite sophisticated and hard for consumers to detect. Some ways to protect yourself:
• Using an ATM located within a bank can significantly lower the odds of interacting with a skimmer compared to accessing more isolated ATMs. Examples of isolated ATMs would be those located outside gas stations or similar sites.
• It’s also possible to find ATMs in other safer locations, such as busy grocery stores and airports, where fraud may be less common due to the ATM machines being too visible or there being good security measures in place.
It’s worth noting that freestanding ATMs, the kind you might find at a convenience store or outside at a self-service gas station, may be hacked by criminals with wifi scanners and other ways of getting past any less-than-optimal security protocols. For this reason, it’s wise to use ATMs that are part of a major network and securely built into a location whenever possible.
ATMs can offer a convenient way to quickly access essential banking services (and get cash) when on the go. While usually a safe option, using an ATM does come with some risk of fraud and theft. Because of this, it’s important to practice safe habits when using an ATM, such as only visiting one at a well-trafficked location and/or during the daytime.
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 3.80% APY on SoFi Checking and Savings.
FAQ
Can you use an ATM at any time?
Some ATMs are open 24 hours a day, seven days a week; it’s often possible to find one accessible at any time. But because other ATMs are located within larger retail spaces (such as malls) or banks, they can have limited operating hours. ATMs may also be closed during less popular hours (such as the middle of the night) due to higher crime rates in an area.
When is the safest time to use an ATM?
The safest time to use an ATM is during the daylight hours, in well-trafficked locations when there are many people around. Whenever possible, try to avoid using an ATM after dark. If you must, it’s best to park close to the ATM and to only use it if it is in a well-lit area. Ideally, you should also bring someone else with you, to help you appear less vulnerable to a would-be thief.
How can ATMs be made safer?
ATMs are safest when they are in highly visible, well-lit areas that make committing a crime less appealing due to an increased likelihood of being caught. Having security cameras surrounding the ATM can also help discourage criminals, including those who may want to apply a card-skimming device. In general, it’s wise to use ATMs that are inside financial institutions or built into well-trafficked locations (such as your supermarket) vs. the freestanding ones or devices that are found outside, say, self-service gas stations.
One other note: Using cardless withdrawal methods can help you avoid the threat of card skimmers stealing your data.
About the author
Jacqueline DeMarco
Jacqueline DeMarco is a freelance writer who specializes in financial topics. Her first job out of college was in the financial industry, and it was there she gained a passion for helping others understand tricky financial topics. Read full bio.
SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).
Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.
Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.
As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.
Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.
Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
*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.
While both ACH and checks have their upsides, ACH tends to be the quicker and more secure payment method. However, in your financial life, there will probably be times when one is a lot better suited to your needs than the other.
Here’s a detailed breakdown of ACH vs. check, the pros and cons of each, and how they stack up.
What Is ACH and How Does It Work?
An ACH transfer (named after the Automated Clearing House network) is an electronic banking transaction that is processed through the ACH network. The network is a major financial hub, made up of around 10,000 institutions. Through the ACH network it is possible to process the following transactions:
Businesses and consumers have the option of using ACH transfers to make direct payments (known as ACH debit transactions) or direct deposits (ACH credit transactions). Some financial institutions even make it possible to schedule and pay bills electronically via ACH transfers. You are probably familiar with ACH transactions when you set up autopay on an account, whether it’s a utility bill or your gym membership.
You may wonder how long ACH transfers take. Because they are electronic, ACH transfers can clear banks in a matter of a few business days as long as there are enough funds in the account. However, there are times where ACH transactions will take longer. This is especially common if a transaction is suspected to be fraud.
However, for something like a direct deposit of a paycheck, ACH can be quite quick. When the payment hits your checking account, it’s immediately available. You don’t have to run around with a paper check that needs to be deposited. That can make a big difference between getting paid by ACH vs. a check.
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No account or overdraft fees. No minimum balance.
Up to 3.80% APY on savings balances.
Up to 2-day-early paycheck.
Up to $3M of additional FDIC insurance.
💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.
Pros and Cons of ACH
Like any financial tool, ACH transfers have some advantages and disadvantages worth considering. Here’s a closer look at some important pros and cons.
Pros
Cons
• Free. Most, but not all, ACH transfers are free.
• Errors can be reversed. You can sometimes request a transaction reversal for ACH transfers if an error occurs.
• Simple and straightforward. Convenient form of payment allowing you to pay without cash.
• Secure. The digital nature of these payments can make them less likely to have funds stolen.
• Fees can apply. May need to pay a fee to expedite bill-pay services or to make a transfer to an outside bank.
• Slow timeline. Can take up to three days for a transfer to go through.
• Potential roadblocks. Daily transfer limits apply.
What Is a Check?
A check is a payment method that involves making a payment using a paper check that has the payment amount and the payee’s bank account information on it. Once someone writes a check, the recipient can cash it and receive the funds.
Pros and Cons of Using a Paper Check
While not as popular as in the past, checks are still one of the most basic and time-honored financial tools at your disposal. They allow you to move money around without paying a fee, and they are a secure way to do this. What’s more, checks create a paper trail with proof that funds have been received.
But they can wind up costing you, they can take longer than you might expect, and sadly, there are scams that prey upon those who use checks. Here are some of the pros and cons of using a check to make payments or to receive payments in chart form.
Pros
Cons
• No fees. Electronic payments can come with fees, but there are no fees for standard checks once you purchase them.
• Safe way to send money. Cash can be lost or stolen. If a check is lost or stolen, the person who finds it will have a hard time cashing it thanks to handy security features.
• Proof of payment. Checks have a paper trail confirming proof of payment.
• Check scams exist.Check scams can be dangerous and easy to fall for.
• Checks cost money. Typically, you don’t pay a fee when you use a check, but it costs money to buy checks, and depending on your situation, you might have to pay a fee to cash a check at some locations.
• Processing delays occur. Paying by cash, credit, or electronic transfer can usually occur more quickly than paying by check.
Here, a side-by-side comparison of ACH vs. checks. It’s important to note that both have their own unique set of advantages and disadvantages, but much of the choice about which to use will depend on your particular circumstances and preferences.
ACH
Check
• For the most part, ACH transfers are free unless a rush fee or a fee for transferring to an outside bank applies.
• It is sometimes possible to request a transaction reversal for ACH transfers if an error occurred.
• ACH payments are fairly simple and easy to conduct.
• ACH transfers can take a few days to clear.
• There are no fees associated with checks, but consumers do have to buy the checks to be able to use them.
• Checks offer a safe way to make payments, but there can be issues with scams and stolen checks.
• Checks provide a convenient paper trail that cash payments lack.
There’s no right or wrong answer when it comes to choosing a check over an ACH transfer. Both have unique advantages and disadvantages. Consider these scenarios:
• Because it’s possible to set up recurring ACH transfers, that can be a much more convenient option if someone wants to schedule ongoing automated payments such as rent or bills.
• Checks, which are very secure and convenient, may be a better fit for one-off payments such as paying the babysitter or a hairdresser.
As you see, the decision depends on what best suits your needs for a particular transaction.
The Takeaway
Both ACH transfers and checks offer benefits. They can be convenient, secure ways to transfer money, though ACH may be faster and safer. Which one is the “best” will often depend on the unique preferences of both parties involved in the transaction. You may well find yourself toggling between the two during your everyday financial life.
While you’re thinking about which kinds of payments work best for you, consider your banking options.
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 3.80% APY on SoFi Checking and Savings.
FAQ
Is an ACH payment a check?
No, ACH payments are an electronic transfer processed through the Automated Clearing House network, which is a network made up of around 10,000 financial institutions. A check is a different kind of payment, using a paper document and being processed in a different way.
Is ACH better than checks?
Not necessarily. ACH can be faster, cheaper, and more secure in certain scenarios, but both can be useful ways to make payments.
Is ACH cheaper than checks?
When it comes to check vs. ACH costs, ACH payments can be cheaper than checks in some cases, but not always. ACH payments are free, whereas consumers generally need to buy checks to use for payments. However, you may run into fees when doing certain ACH payments.
Is ACH safer than a check?
Both checks and ACH transfers are very secure, but ACH payments are known to be more secure, thanks to the extra layers of protection in place due to encryption that occur during the transfer. Both checks and ACH transfers do require that the identity of the recipient be verified before the transaction can complete. Fraud and mistakes can occur for both payment types.
About the author
Jacqueline DeMarco
Jacqueline DeMarco is a freelance writer who specializes in financial topics. Her first job out of college was in the financial industry, and it was there she gained a passion for helping others understand tricky financial topics. Read full bio.
SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).
Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.
Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.
As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.
Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.
Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet. 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.
ACH return codes are generated when an ACH (Automated Clearing House) payment fails to process and therefore gets returned. ACH payments, which essentially transfer funds between financial institutions, can be a huge convenience. They allow you to set up automatic monthly bill pay and receive direct deposit of one’s paycheck, for instance. There are, however, likely to be times when a transaction doesn’t work as expected, perhaps due to incorrect coding or insufficient funds. ACH return codes indicate exactly what went wrong.
Here, you’ll learn about what ACH return codes are and what steps you can take to help complete this kind of banking transaction, especially if you are managing a business that relies upon them.
What Are ACH Return Codes?
First, know that ACH refers to the Automated Clearing House, a U.S. financial network that provides electronic transfers among banks and credit unions. If you receive your paycheck by direct deposit or set up bill pay from your checking account, you are using the ACH system. It’s considered a fast, secure, and simple way to move money.
ACH returns occur when an ACH payment can’t be completed.
There are a few reasons why these transactions aren’t successful, including:
• The originator (the entity who requested payment) provided inaccurate or incomplete payment information or data.
• The originator isn’t authorized to debit the client’s account with an ACH payment.
• There aren’t sufficient funds to complete the transaction.
The ACH return code alerts the parties involved so they know there’s an issue, whether a recurring automatic bill pay suddenly stopped or a one-time payment could not go through. The specific reason can then help the situation be remedied so the payment can hopefully be sent again properly.
Here’s an example to clarify this concept: Perhaps your wifi provider is authorized to withdraw payment monthly from your checking account. If the Originating Depository Financial Institution (ODFI; the wifi provider’s bank) or the Receiving Depository Financial Institution (RDFI; the entity receiving the payment request; aka your bank) isn’t able to transfer funds, a return code will be generated to explain exactly why the transaction wasn’t completed.
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How ACH Returns Work
If an ACH payment can’t be completed, as mentioned above, a specific return code will be generated. The person or business originating the payment request can then work to resolve the issue.
A few details to note about how ACH returns work:
• If an ACH return occurs due to insufficient funds, the consumer may be on the hook for an ACH return charge. It’s similar to when a check bounces; the end user pays a small fee; in this case, usually $2 to $5.
• Timing-wise, most ACH returns only take about two banking days, though a few of these ACH codes involve transactions that can take up to 60 days to process.
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Common ACH Return Codes
There are 85 distinct ACH return codes. Here, you’ll learn about some of the most common ones. These return codes are typically received by the entity requesting payment and their bank.
Code: R01 Meaning: Insufficient funds (the account’s available balance isn’t sufficient to cover the funds transfer, similar to being in overdraft) What to do: The entity requesting payment can attempt the transaction again as a new transaction within 30 days of the original authorization date (up to two times), or contact the customer for an alternate payment method.
Code: R02 Meaning:Account closed (a once-active account has been closed). What to do: The entity requesting payment can ask the customer to correct their account information or provide a different bank account or form of payment to complete the transaction.
Code: R03 Meaning: No account exists or unable to locate account (even though the account number structure is valid, it doesn’t pass the check digit validation). What to do: The request’s originator should contact the customer to confirm their routing number, bank account number, and the name on the bank account. If this information differs from what was originally entered, they can submit a new payment with these new details. Or request another form of payment.
Code: R04 Meaning: Invalid account number. What to do: The entity requesting payment should check the account number, and retry the transaction. Or obtain the correct bank account number and submit a new payment with that account number.
Code: R05 Meaning: This transaction should have been processed as a consumer, not corporate, transaction. What to do: The request’s originator should check that you have used the right codes. They can contact the customer and ask for a new form of payment. In some cases, they may need to file an appeal with Nacha (the non-profit organization that manages the ACH network) for this kind of returned transaction.
Code: R06 Meaning: Returned at ODFI’s request (ODFI requested that the RDFI return the ACH entry), often because the transaction is believed to be fraudulent. What to do: The entity seeking payment should contact the ODFI to understand why the transaction was rejected, and then, depending on the response, resubmit or alter the request.
Code: R07 Meaning: The previous authorization for an ACH transaction was revoked by the customer. What to do: The originator of the request should suspend recurring payment schedules entered for this specific bank account to prevent additional transactions from being returned. Then they need to address the issue with the customer, and try to resolve the issue by getting a new form of payment or asking to debit a different bank account.
Code: R08 Meaning: The customer has issued a stop payment on the item. What to do: The entity requesting funds should contact the customer to resolve the issue, and then re-enter the returned transaction again with proper authorization from the customer. Or request a new form of payment.
Code: R09 Meaning: Due to uncollected funds, the originator can’t access enough money to cover the transaction. What to do: The originator should try the transaction again, and re-enter it as a new one within 30 days of the original authorization date (up to two times in 60 days).
Code: R10 Meaning: The customer advised this transaction is not authorized or is improper in some way. What to do: The entity requesting payment should check the details and authorization on the transaction to determine if an error was made. They can connect with the customer to determine why this code was triggered. If the details can be rectified, they can resubmit the transaction per ACH guidelines.
Code: R11 Meaning: An electronic check deposit was not executed correctly. What to do: The originator of the request can correct the underlying error and resubmit the corrected electronic deposit within 60 calendar days.
Code: R12 Meaning: The branch where the account is held was sold to another DFI (development financial institution). What to do: The entity making the request should obtain the customer’s new routing and bank account information, and submit a new transaction.
The following ACH return codes are less common than those mentioned previously, but still occur and are worth knowing. Here’s a look at what makes these codes tick:
Code: R13 Meaning: Invalid routing number provided. What to do: The request’s originator should get the correct routing number from the customer to use when resubmitting the request.
Code: R14 Meaning: The account was being managed by someone who is now deceased or can no longer continue overseeing the account (such as an account held for a minor or an incapacitated person). What to do: This is handled on a case-by-case basis; the request’s originator might try to contact the beneficiary or new representative for the account.
Code: R15 Meaning: Beneficiary or account holder is deceased. What to do: No further action can typically be taken.
Code: R16 Meaning: Account is frozen and funds are unavailable. What to do: The entity making the request should obtain a new payment form.
Code: R17 Meaning: Known as a “file record edit criteria” code, this indicates that there is a discrepancy in the file code, and the transaction cannot be processed. What to do: The fields causing the processing error need to be identified (typically by the originator of the request) in the addenda record information field of the return to complete the transaction.
Code: R20 Meaning: The receiving account is not a transaction account (aka, it’s an account against which transactions are prohibited or limited). What to do: The entity making the request can contact the customer, and request either the authorization to charge a different bank account or a new form of payment.
Code: R21 Meaning: The ACH file contains an invalid or incorrect company identification number. What to do: The originator of the request should double-check their information, or contact the company to obtain the correct information.
Code: R22 Meaning: The individual ID number is invalid. What to do: The entity making the request should check their information and resubmit, or contact the customer to obtain the correct information.
Code: R23 Meaning: The account holder or their bank is refusing to accept the transaction. What to do: The originator of the request can work with the customer to clear up the issue, or ask them to contact their bank to resolve it.
Code: R24 Meaning: Duplicate entry. What to do: If the transaction is indeed a duplicate, there’s nothing else to do. If it isn’t, the entity making the request can contact their customer or their customer’s bank to resolve the error.
Code: R29 Meaning: The customer has notified their bank that the requesting entity is not authorized to conduct this transaction. What to do: The originator of the request should suspend recurring payment schedules, and then address the issue with the customer. For instance, they could request new payment information from the customer or ask them to contact their bank to authorize the payment.
Code: R31 Meaning: This indicates that the receiving bank is requesting to return a certain kind of ACH transaction (a CCD, or cash concentration disbursement, and CTX, or corporate trade exchange, only). What to do: The entity making the request can reach out to their customer to resolve this issue or request a different form of payment.
Code: R33 Meaning: There is an issue with a transaction involving a converted check (known as XCK), such as when a damaged paper check is converted to an electronic version. What to do: The originator of the request should contact their customer for another payment form.
ACH return codes express the reason why an electronic Automated Clearing House payment could not be completed. Knowing what each code represents can help determine what the next steps should be to keep payments flowing smoothly or get refunds completed.
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FAQ
What causes an ACH return?
ACH returns occur when an Automated Clearing House payment can’t be completed, perhaps due to inaccurate or incomplete information or insufficient funds. When this happens, an ACH return code is generated, providing a reason for the return.
What is ACH return fee?
When ACH returns occur, especially due to insufficient funds, a fee can be charged. It’s similar to how a bounced check incurs a fee. The amount is generally around $2 to $5.
How long does an ACH refund take?
Typically, an ACH refund takes about five to 10 banking days to occur, though some situations can take longer to resolve..
About the author
Jacqueline DeMarco
Jacqueline DeMarco is a freelance writer who specializes in financial topics. Her first job out of college was in the financial industry, and it was there she gained a passion for helping others understand tricky financial topics. Read full bio.
SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).
Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.
Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.
As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.
Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.
Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet. 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.
As you’ve been planning and saving for retirement, you may have heard that there’s a “401(k) tax deduction.” And while there are definitely tax benefits associated with contributing to a 401(k) account, the term 401(k) tax deduction isn’t accurate.
You cannot deduct your 401(k) contributions on your income tax return, per se — but the money you save in your 401(k) is deducted from your gross income, which can potentially lower how much tax you owe.
This is not the case for a Roth 401(k), a relative newcomer in terms of retirement accounts. These accounts are funded with after-tax contributions, and so tax deductions don’t enter the picture.
Key Points
• 401(k) contributions are not tax deductible, but they lower your taxable income.
• Roth 401(k) contributions are made with after-tax money and do not provide tax deductions.
• Contributions to employer-sponsored plans like 401(k) or 403(b) are taken out of your salary and reduce your taxable income.
• 401(k) withdrawals are taxed as income, and early withdrawals may incur additional penalties.
• Making eligible contributions to a 401(k) or IRA can potentially qualify you for a Retirement Savings Contributions Credit.
How Do 401(k) Contributions Affect Your Taxable Income?
The benefits of putting pre-tax dollars toward your 401(k) plan are similar to a tax deduction, but are technically different.
• An actual tax deduction (similar to a tax credit) is something you document on your actual tax return, where it reduces your gross income.
• Contributions to an employer-sponsored plan like a 401(k) or 403(b) are actually taken out of your salary, so that money is not taxed, and thus your taxable income is effectively reduced. But this isn’t technically a tax deduction.
People will often say your 401(k) contributions are tax deductible, or you get a tax deduction for saving in a 401(k), but it’s really that your 401(k) savings are deducted from your salary, and not taxed.
The money in the account also grows tax free over time, and you would pay taxes when you withdraw the money.
Example of a 401(k) Contribution
Let’s say you earn $75,000 per year. And let’s imagine you’re contributing 10% of your salary to your 401(k), or $7,500 per year.
Your salary is then reduced by $7,500, an amount that is noted on your W2. As a result, your taxable income would drop to $67,500.
Would that alone put you in a lower tax bracket? It’s possible, but your marginal tax rate is determined by several things, including deductions for Social Security and Medicare taxes, so it’s a good idea to take the full picture into account or consult with a professional.
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1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.
Do You Need to Report 401(k) Contributions on Your Tax Return?
The short answer is no. Because 401(k) contributions are taken out of your paycheck before being taxed, they are not included in taxable income and they don’t need to be reported on a tax return (e.g. Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors).
Your employer does include the full amount of your annual contributions on your W2 form, which is reported to the government. So Uncle Sam does know how much you’ve contributed that year.
You won’t need to report any 401(k) income until you start taking distributions from your 401(k) account — typically after retiring. At that time, you’ll be required to report the withdrawals as income on your tax return, and pay the correct amount of taxes.
When you’re retired and withdrawing funds (aka taking distributions), the hope is that you’ll be in a lower tax bracket than while you were working. In turn, the amount you’re taxed will be relatively low.
How the Employer Match Works
When an individual receives a matching contribution to their 401(k) from their employer, this amount is also not taxed. A typical matching contribution might be 3% for every 6% the employee sets aside in their 401(k). In this case, the matching money would be added to the employee’s account, and the employee would not owe tax on that money until they withdrew funds in retirement.
Generally, all traditional 401(k) retirement plan distributions are eligible for income tax upon withdrawal of the funds (note: that rule does not apply to Roth 401(k)s, since contributions to those plans are made with after-tax dollars, and withdrawals are generally tax free).
If you withdraw money before the age of 59 ½ it’s known as an “early” or “premature” distribution. For these early withdrawals, individuals have to pay an additional 10% tax as a part of an early withdrawal penalty, with some exceptions, including withdrawals that occur:
• After the death of the plan participant
• After the total and permanent disability of the plan participant
• When distributed to an alternate payee under a Qualified Domestic Relations Order
• During a series of substantially equal payments
• Due to an IRS levy of the plan
• For qualified medical expenses
• Certain distributions for qualified military reservists called to active duty
For individuals looking to withdraw from their 401(k) plan before age 59 ½, a 401(k) loan may be a better option that will not result in withdrawal penalties, but these loans with their own potential consequences.
How Do Distributions From a 401(k) Work?
Once you turn 59 ½, you can withdraw 401(k) funds at any time, and you will owe income tax on the money you withdraw each year. That said, you cannot keep your retirement funds in the account for as long as you wish.
When you turn 73, the IRS requires you to start withdrawing money from your 401(k) each year. These withdrawals are called required minimum distributions (or RMDs), and it’s important to understand how they work because if you don’t withdraw the correct amount by Dec. 31 of each year, you could get hit with a big penalty.
Prior to 2019, the age at which 401(k) participants had to start taking RMDs was 70 ½. The rule changed in 2019 and the required age became 72. In 2023 the rule changed again and you currently need to start taking RMDs at age 73 (as long as you turn 72 after December 31, 2022). Now, when you turn 73 the IRS requires you to start taking withdrawals from your 401(k), or other tax-deferred accounts (like a traditional IRA or SEP IRA).
If you don’t take the required minimum amount each year, you could face another requirement: to pay a penalty of 25% of the withdrawal you didn’t take — or 10% if the mistake is corrected within two years.
All RMDs from tax-deferred accounts like 401(k) plans are taxed as ordinary income. If you withdraw more than the required minimum, no penalty applies.
Making eligible contributions to an employer-sponsored retirement plan such as a 401(k) or an IRA can potentially lead to a tax credit known as a Retirement Savings Contributions Credit, or a Saver’s credit. There are three requirements that must be met to qualify for this credit.
1. Individual must be age 18 or older.
2. They cannot be claimed as a dependent on someone else’s return.
3. They can not be a student (certain exclusions apply).
The amount of the credit received depends on the individual’s adjusted gross income.
The credit amount is typically 50%, 20%, or 10% of contributions made to qualified retirement accounts such as a 401(k), 4013(b), 457(b), traditional or Roth IRAs.
The maximum contribution amount that qualifies for this credit is $2,000 for individuals, and $4,000 for married couples filing jointly, bringing the maximum credit to $1,000 for individuals and $2,000 for those filing jointly. Rollover contributions don’t qualify for this credit.
Alternatives for Reducing Taxable Income
Aside from contributing to a traditional 401(k) account, there are other ways to reduce taxable income while putting money away for the future.
Traditional IRA: Traditional IRAs are one type of retirement plan that can lower taxable income. Individuals may be able to deduct their traditional IRA contributions on their federal income tax returns. The deduction is typically available in full if an individual (and their spouse, if married) doesn’t have retirement plan coverage offered by their work. Their deduction may be limited if they or their spouse are offered a retirement plan at work, and their income exceeds certain levels.
SEP IRA: SEP IRAs are a possible alternative investment account for individuals who are self-employed and don’t have access to an employee sponsored 401(k). Taxpayers who are self-employed and contribute to an SEP IRA can qualify for tax deductions.
403(b) Plans: A 403(b) plan applies to employees of public schools and tax-exempt organizations, and certain ministers. Employees with 403(b) plans can contribute some of their salary to the plan, as can their employer. As with a traditional 401(k) plan, the participant doesn’t need to pay income tax on any allowable contributions, earnings, or gains until they begin to withdraw from the plan.
Charitable donations: It’s possible to claim a deduction on federal taxes after donating to charities and non-profit organizations with 501(c)(3) status. To deduct charitable donations, an individual has to file a Schedule A with their tax form and provide proper documentation regarding cash or vehicle donations.
To deduct non-cash donations, they have to complete a Form 8283. For donated non-cash items, individuals can claim the fair market value of the items on their taxes. from the IRS explains how to determine vehicle deductions. For donations that involve receiving a gift or a ticket to an event, the donor can only deduct the amount of the donation that exceeds the worth of the gift or ticket received. Individuals are generally required to include receipts when they submit their return.
Earned Income Tax Credit: Individuals and married couples with low to moderate incomes may qualify for the Earned Income Tax Credit (EITC). This particular tax credit can help lower the amount of taxes owed if the individual meets certain requirements and files a tax return — whether or not the individual owes money. Filing a return in this case can be beneficial, because if EITC reduces the amount of taxes owed to less than $0, then the filer may actually get a refund.
The Takeaway
Individuals who expect a 401(k) deduction come tax time may be disappointed to learn that there is no such thing as a 401(k) tax deduction. But they may be pleased to learn the other tax benefits of contributing to a 401(k) retirement account.
Contributions are made with pre-tax dollars, which effectively lowers one’s amount of taxable income for the year — and that may in turn lower the amount of income taxes owed.
Once an individual reaches retirement age and starts withdrawing funds from their 401(k) account, that money will be considered income, and will be taxed accordingly.
Another way to maximize your retirement savings: Consider rolling over your old 401(k) accounts so you can manage your money in one place with a rollover IRA. SoFi makes the rollover process seamless and simple. There are no rollover fees. The process is automated so you’ll avoid the risk of a penalty, and you can complete your 401(k) rollover quickly and easily.
Jacqueline DeMarco is a freelance writer who specializes in financial topics. Her first job out of college was in the financial industry, and it was there she gained a passion for helping others understand tricky financial topics. Read full bio.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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.
