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Mar

2025

Understanding Economic Indicators

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

An economic indicator is a statistic or piece of data that offers insight into an economy. Analysts use economic indicators to gauge where an economic system is in the present moment, and where it might head next. Governments use economic indicators as guideposts when assessing monetary or fiscal policies, and corporations use them to make business decisions. Individual investors can also look to these indicators as they shape their portfolios.

There are different types of economic indicators and understanding how they work can make it easier to interpret them, and fold them into your investing strategy.

What Is an Economic Indicator?

An economic indicator is typically a macroeconomic data point, statistic, or metric used to analyze the health of an individual economy or the global economy at large. Government agencies, universities, and independent organizations can collect and organize economic indicator data.

In the United States, the Census Bureau, Bureau of Economic Analysis (BEA) and the Bureau of Labor Statistics (BLS) are some of the entities that aggregate economic indicator data.

Some of the most recognizable economic indicators examples include:

• Gross domestic product (GDP)

• Personal income and real earnings

• International trade in goods and services

• U.S. import and expert prices

• Consumer prices (as measured by the Consumer Price Index or CPI)

• New residential home sales

• New home construction

• Rental vacancy rates

• Home ownership rates

• Business inventories

• Unemployment rates

• Consumer confidence

Private organizations also regularly collect and share economic data investors and economists may use as indicators. Examples of these indicators include the Fear and Greed Index, existing home sales, and the index of leading economic indicators.

Together, these indicators can provide a comprehensive picture of the state of the economy and shine light on potential opportunities for investors.

How Economic Indicators Work

Economic indicators work by measuring a specific component of the economy over a set time period. An indicator may tell you what patterns are emerging in the economy — or confirm the presence of patterns already believed to be established. In that sense, these indicators can serve as a thermometer of sorts for gauging the temperature of the economic environment or where an economy is in a given economic cycle.

Economic indicators can not predict future economic or market movements with 100% accuracy. But they can be useful when attempting to identify signals about which way the economy (and the markets) might head next.

For example, an investor may study an economic indicator like consumer prices when gauging whether inflation is increasing or decreasing. If the signs point to a steady rise in prices, the investor might then adjust their portfolio to account for higher inflation. As prices rise, purchasing power declines but investors who are conscious of this economic indicator could take action to minimize negative side effects.

Types of Economic Indicators

Economic indicators are not all alike in terms of what they measure and how they do it. Different types of economic indicators can provide valuable information about the state of an economy. Broadly speaking, they can be grouped into one of three categories: Leading, lagging, or coincident.

Leading Indicators

Leading indicators are the closest thing you might get to a crystal ball when studying the markets. These indicators pinpoint changes in economic factors that may precede specific trends.

Examples of leading indicators include:

• Consumer confidence and sentiment

• Jobless claims

• Movements in the yield curve

• Stock market volatility

A leading indicator doesn’t guarantee that a particular trend will take shape, but it does suggest that conditions are ripe for it to do so.

Lagging Indicators

Lagging indicators are the opposite of leading indicators. These economic indicators are backward-looking and highlight economic movements after the fact.

Examples of lagging indicators include:

• Gross national product (GNP)

• Unemployment rates

• Consumer prices

• Corporate profits

Analysts look at lagging indicators to determine whether an economic pattern has been established, though not whether that pattern is likely to continue.

Coincident Indicators

Coincident indicators measure economic activity for a particular area or region. Examples of coincident indicators include:

• Retail sales

• Employment rates

• Real earnings

• Gross domestic product

These indicators reflect economic changes at the same time that they occur. So they can be useful for studying real-time trends or patterns.

Popular Economic Indicators

There are numerous economic indicators the economists, analysts, institutional and retail investors use to better understand the market and the direction in which the economy may move. The Census Bureau, for example, aggregates data for more than a dozen indicators. But investors tend to study some indicators more closely than others. Here are some of the most popular economic indicators and what they can tell you as an investor.

Gross Domestic Product

Gross domestic product represents the inflation-adjusted value of goods and services produced in the United States. This economic indicator offers a comprehensive view of the country’s economic activity and output. Specifically, gross domestic product can tell you:

• How fast an economy is growing

• Which industries are growing (or declining)

• How the economic activity of individual states compares

The Bureau of Economic Analysis estimates GDP for the country, individual states and for U.S. territories. The government uses GDP numbers to establish spending and tax policy, as well as monetary policy, at the federal levels. States also use gross domestic product numbers in financial decision-making.

Consumer Price Index

The Consumer Price Index or CPI measures the change in price of goods and services consumed by urban households. The types of goods and services the CPI tracks include:

• Food and beverages

• Housing

• Apparel

• Transportation

• Medical care

• Recreation

• Education

• Communications

CPI data comes from 75 urban areas throughout the country and approximately 23,000 retailers and service providers. This economic indicator is the most widely used tool for measuring inflation. According to the Bureau of Labor Statistics, which compiles the consumer price index, it’s a way to measure a government’s effectiveness in managing economic policy.

Producer Price Index

The Producer Price Index or PPI measures the average change over time in the selling prices received by domestic producers of goods and services. In simpler terms, this metric measures wholesale prices for the sectors of the economy that produce goods, including:

• Mining

• Manufacturing

• Agriculture

• Fishing

• Forestry

• Construction

• Natural gas and electricity

The Producer Price Index can help analysts estimate inflation, as higher prices will show up on the wholesale level first before they get passed on to consumers at the retail level.

Unemployment Rate

The unemployment rate is an economic indicator that tells you the number of people currently unemployed and looking for work. The BLS provides monthly updates on the unemployment rate and nonfarm payroll jobs. Together, the unemployment rate and the number of jobs added or lost each month can indicate the state of the economy.

Higher unemployment, for example, generally means that the economy isn’t creating enough jobs to meet the demand by job seekers. When the number of nonfarm payroll jobs added for the month exceeds expectations, on the other hand, that can send a positive signal that the economy is growing.

Consumer Confidence

The Consumer Confidence Index can provide insight into future economic developments, based on how households are spending and saving money today. This indicator measures how households perceive the economy as a whole and how they view their own personal financial situations, based on the answers they provide to specific questions.

When the indicator is above 100, this suggests consumers have a confident economic outlook, which may make them more inclined to spend and less inclined to save. When the indicator is below 100, the mood is more pessimistic and consumers may begin to curb spending in favor of saving.

The Consumer Confidence Index is separate from the Consumer Sentiment Index, which is also used to gauge how Americans feel about the economy. This index also uses a survey format and can tell you how optimistic or pessimistic households are and what they perceive to be the biggest economic challenges at the moment.

Retail Sales

Retail sales are one of the most popular economic indicators for judging consumer activity. This indicator measures retail trade from month to month. When retail sales are higher, consumers are spending more money. If more spending improves company profits, that could translate to greater investor confidence in those companies, which may drive higher stock prices.

On the other hand, when retail sales lag behind expectations the opposite can happen. When a holiday shopping season proves underwhelming, for example, that can shrink company profits and potentially cause stock prices to drop.

Housing Starts

Census Bureau compiles data on housing starts. This economic indicator can tell you at a glance how many new home construction projects in a given month. This data is collected for single-family homes and multi-family units.

Housing starts can be useful as an economic indicator because they give you a sense of whether the economy is growing or shrinking. In an economic boom, it’s not uncommon to see high figures for new construction. If the boom goes bust, however, new home start activity may dry up.

It’s important to remember that housing starts strongly correlate to mortgage interest rates. If mortgage rates rise in reaction to a change in monetary policy, housing starts may falter, which makes this economic indicator more volatile than others.

Interest Rates

Federal interest rates are an important economic indicator because of the way they’re used to shape monetary policy. The Federal Reserve makes adjustments to the federal funds rate — which is the rate at which commercial banks borrow from one another overnight–based on what’s happening with the economy overall. These adjustments then trickle down to the interest rates banks charge for loans or pay to savers.

For example, when inflation is rising or the economy is growing too quickly, the Fed may choose to raise interest rates. This can have a cooling effect, since borrowing automatically becomes more expensive. Savers can benefit, however, from earning higher rates on deposits.

On the other hand, the Fed may lower rates when the economy is sluggish to encourage borrowing and spending. Low rates make loans less expensive, potentially encouraging consumers to borrow for big-ticket items like homes, vehicles, or home improvements. Consumer spending and borrowing can help to stimulate the economy.

Stock Market

The stock market and the economy are not the same. But some analysts view stock price and trading volume as a leading indicator of economic activity. For example, investors look forward to earnings reports as an indicator of a company’s financial strength and health. They use this information about both individual companies and the markets as a whole to make strategic investment decisions.

If a single company’s earnings report is above or below expectations, that alone doesn’t necessarily suggest where the economy might be headed. But if numerous companies produce earnings reports that are similar, in terms of meeting or beating expectations, that could indicate an economic trend.

If multiple companies come in below earnings expectations, for example, that could hint at not only lower market returns but also a coming recession. On the other hand, if the majority of companies are beating earnings expectations by a mile, that could signal a thriving economy.

The Takeaway

Economic indicators can provide a significant amount of insight into the economy and the trends that shape the markets. Having a basic understanding of the different types of economic indicators could give you an edge if you’re better able to anticipate market movements when you start investing.

Economic indicators aren’t perfect, and while they can be a helpful part of an investing strategy, investors should always do as much research as they can before making specific moves. Discussing a strategy with a financial professional may be a good idea, too.

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FAQ

What are the leading economic indicators?

There are several leading economic indicators in the U.S., and they include consumer confidence and sentiment, jobless claims, movements in the yield curve, and stock market volatility.

What are the big three macro indicators?

While they may not be “the” big three macro indicators, a few of the key macroeconomic indicators that are often cited are gross domestic product (GDP), the unemployment rate, and the Consumer Price Index (CPI).

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/FG Trade

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

Mar

2025

Guide to ESAs and How They Work

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

A Coverdell Education Savings Account (ESA) is a tax-advantaged way to set aside money for educational expenses, including those for primary, secondary, and higher education. You can open one in addition to a 529 college savings plan, or in place of one.

Generally speaking, an ESA has similar rules and benefits to a 529 plan, but more stringent income and contribution limits. ESAs offer more investment choices, however.

🛈 Currently, SoFi does not offer ESAs.

What Is an Education Savings Account (ESA)?

An Education Savings Account is a type of custodial account that can be established to save money for qualified education expenses for students in grades K-12, as well as in college. ESA funds can be withdrawn to pay for tuition, textbooks, tutoring, and other education-related expenses. Non-qualified withdrawals will be taxed.

Parents, grandparents, and other individuals can open educational savings accounts on behalf of an eligible beneficiary (the student) and make annual contributions. Contributions are limited to $2,000 per year, total, per beneficiary.

ESA Rules

These accounts are different from traditional savings accounts or high-yield savings accounts because they’re designed for a single purpose: funding education expenses. That means you have less flexibility when it comes to withdrawals, but the tax benefits can make up for it.

Setting up a college fund at a bank or brokerage that offers ESAs is usually just a matter of filling out an application and meeting the requirements.

• The beneficiary must be under 18 when the account is opened (or be a special needs beneficiary, per the IRS).

• If you make more than $110,000 in income (for single filers), or $220,000 (married filing jointly), you cannot contribute to an ESA. See below for details.

• It’s possible to contribute to an ESA and a 529 college savings plan for the same student.

How Do ESAs Work?

Education Savings Accounts work by allowing savers to contribute money for the benefit of an eligible student on a tax-advantaged basis. Contributions are not deductible, but they grow tax-deferred; and withdrawals are tax free when used for qualified education expenses.

Because contributions are made with after-tax dollars (similar to a Roth IRA), you can withdraw the amount of your contributions at any time tax free. But earnings are taxable. Thus the earnings portion of non-qualified withdrawals will be taxed as income, and you may get hit with a 10% penalty on that taxable amount as well.

You might use an ESA to fund future expenses for K-12 tuition, as well as saving for your child’s college tuition. The IRS imposes guidelines on how these plans can be used to pay for education. Unlike 529 plans in some states, you cannot deduct contributions to an ESA.

Income Limits

In addition, your income determines your ability to contribute to an Education Savings Account. You might be eligible to make a full contribution, a partial contribution, or no contribution at all.

Generally, full contributions are allowed for:

• Single filers with a modified adjusted gross income (MAGI) below $95,000

• Married couples filing jointly with a MAGI below $190,000

Partial contributions are allowed for:

• Single filers with MAGI between $95,000 and $110,000

• Married couples filing jointly with MAGI between $190,000 and $220,000

If you file single and have a MAGI greater than $110,000, or are married with a MAGI greater than $220,000, you can’t contribute to an Education Savings Account.

Contribution Limits

The IRS is very clear about how much you can contribute to an ESA each year, for each student. The annual contribution limit is $2,000. That limit applies per beneficiary, no matter how many educational savings accounts they have.

For example, if you open an ESA for your child and contribute $1,400, and the child’s grandparents also open an ESA for the same child, they could only contribute $600 for the same year.

Excess contributions in a given year may face a penalty of 6%, except under certain circumstances. You can find more information at IRS.gov.

ESA Withdrawal Rules

As with any tax-deferred account, whether for retirement (like an IRA) or for education, ESA withdrawals rules are complicated. Withdrawals are tax-free when the money is used for qualified education expenses incurred at an eligible education institution. A qualified education institution is any school that’s eligible to participate in federal student aid programs.

You can use ESA funds to pay for college expenses, secondary school expenses, or elementary school expenses. If you’re using an ESA for college savings, qualified higher education expenses include:

• Tuition and fees

• Books, supplies, and equipment

• Room and board, for students enrolled at least half-time

• Expenses for special needs services for a special needs beneficiary

A portion of the withdrawals that exceed a student’s qualified education expenses are treated as taxable income by the IRS.

Elementary and Secondary School Expenses

ESA funds can also be used to cover tuition and fees, books, supplies, equipment, academic tutoring, and special needs services at secondary or elementary schools. Room and board, uniforms, transportation, and supplementary items may also be covered if the school requires them as a condition of attendance.

Handling Leftover Funds

Leftover funds must be distributed within 30 days of the designated beneficiary’s 30th birthday, unless they qualify for a special needs exception. Or, if the beneficiary dies before turning 30, you must also withdraw any remaining funds within 30 days of their death.

Here’s one important thing to know:

A portion of withdrawals (i.e. earnings) from an Education Savings Account that aren’t for a qualified education expense, including required distributions at age 30, may be taxed as income and subject to a 10% penalty. You can avoid these tax penalties by rolling the balance over to another ESA for another member of the original beneficiary’s family.

ESA Pros and Cons

Is an Education Savings Account a good way to save for education? There are advantages and drawbacks to consider if you’re trying to decide how to pay your child’s college tuition.

Here are some of the pros:

• Earnings grow tax-deferred, and you can open an ESA as a supplement to other college savings plans.

• Qualified withdrawals are 100% tax-free and can be used for elementary, secondary, or higher education expenses.

• Should your student decide not to go to college, you can transfer their ESA to another beneficiary (similar to a 529 plan), but they must be under 30.

• Most ESA plans offer a wide array of investment choices.

Now for the cons:

• With a $2,000 annual contribution limit per child, you can only save so much with an ESA.

• Distributions for anything other than education expenses are subject to tax and penalties (including funds left over when the child’s education is complete).

• Excess contributions may face a 6% penalty.

• High-income earners may be ineligible to contribute to an Education Savings Account.

The deadline for withdrawals at age 30 can also be a disadvantage. With a 529 savings plan, you’re not required to take money out by a specific date or age, and you’re permitted to rollover unused funds to a Roth IRA for the beneficiary.

ESA vs 529 Savings Plan

A 529 savings plan is another tax-advantaged way to save for college. Thanks to a recent rule change, parents can also withdraw funds from a 529 to pay for qualified K-12 tuition expenses.

So, how does a 529 compare to an ESA? Here’s a quick rundown.

	Education Savings Account	529 College Savings Plan
Who Can Contribute	Individuals whose MAGI is within IRS limits	Anyone, regardless of income
Annual Contribution Limit	$2,000 per child	None, though contributions above the annual gift tax exclusion limit may trigger the gift tax Lifetimes contributions (typically between $235,000-$575,000) are determined by each state
Eligible Beneficiaries	Students under the age of 18, or special needs students of any age (you cannot contribute after the student turns 18)	Any future student, including oneself, one’s spouse, children, grandchildren, or other relatives, regardless of age
Investment Options	Typically a wide array of investment choices	Typically limited or pre-set by the plan provider
Taxes on Withdrawals	Withdrawals for qualified education expenses are tax free; all other withdrawals are subject to tax and penalties	Withdrawals for qualified education expenses are tax-free; all other withdrawals are subject to tax and penalties
Eligible Expenses	Withdrawals can be used to pay for elementary, secondary, and higher education expenses, including tuition, fees, books, and equipment	Withdrawals can be used to pay for qualified higher education expenses, including tuition, fees, books, and equipment, as well as K-12 tuition, eligible apprenticeship expenses, and qualified education loan repayments
Mandatory Distributions	All funds must be withdrawn by age 30, excluding special needs beneficiaries	Funds can remain in the account indefinitely or be rolled over to another beneficiary
FAFSA Impact	Treated as parental assets	Treated as parental assets

The benefits of a 529 savings plan may outweigh the advantages of an Education Savings Account. Aggregate contribution limits for 529 plans are much higher and there’s no hard cutoff for using the money.

The Takeaway

Saving up for college can reduce the need for students to take out federal or private loans to pay for school. An Education Savings Account is one option for saving; a 529 plan is another. You can also consider opening a Roth IRA for yourself or your child, as it’s possible to access the amount you contribute for expenses like education.

FAQ

How does an education savings account work?

An Education Savings Account works by allowing you to set aside $2,000 per year on behalf of an eligible student to cover education expenses, from elementary school through college. Your earnings grow tax-deferred, and you pay no taxes on withdrawals when they’re used for qualified expenses.

Is an ESA the same as a 529?

An ESA is not the same as a 529 plan. If you’re starting college savings late, you may get more benefits from contributing to a 529 plan versus an Education Savings Account. The annual contribution limits for 529 plans are much higher than they are for an ESA, meaning you could save quite a bit more — and you’re not required to stop making contributions once your child turns 18.

What is the income limit for an ESA?

The income limit for making a full contribution to an ESA is $95,000 for single filers and $190,000 for married couples filing jointly. You’ll need to have a modified adjusted gross income below those thresholds to contribute the $2,000 maximum; if you earn up to $110,000 (single) and $220,000 (joint) you can make a partial contribution.

About the author

Rebecca Lake

Photo credit: iStock/RyanJLane

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For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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Mar

2025

What Are Penalties for Early CD Withdrawal?

CD Early Withdrawal Penalty, Explained

By Rebecca Lake | Budgeting & Goals, money | Comments Off

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

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

What Is a CD Early Withdrawal Penalty?

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

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

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

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

• Maturity term of the CD

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

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

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

How to Calculate an Early Withdrawal Penalty for a CD

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

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

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

CD Term	CD Early Withdrawal Penalty
1 year	• 180 days’ interest • 3 months’ interest • Half of interest the money would have earned over entire term or 1% of the amount withdrawn, whichever is greater, plus $25
3 years	• 180 days’ interest • 6 months’ interest • Half of interest the money would have earned over entire term or 3% of the amount withdrawn, whichever is greater, plus $25

CD Term

CD Early Withdrawal Penalty

1 year

• 180 days’ interest

• 3 months’ interest

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

3 years

• 180 days’ interest

• 6 months’ interest

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

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

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

• The amount withdrawn

• The entire balance

• Daily interest or monthly interest.

Calculating a CD Early WIthdrawal Penalty

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

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

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

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

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

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

Ways to Avoid Early Withdrawal Penalties for a CD

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

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

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

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

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

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

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

Recommended: What Does Private Banking Offer?

When to Withdraw CDs Early

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

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

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

Recommended: 10 Personal Finance Basics

The Takeaway

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

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

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FAQ

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

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

Can I write off a CD early withdrawal penalty?

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

About the author

Rebecca Lake

Photo credit: iStock/tolgart

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. 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.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

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 every 31 calendar days.

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 the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, 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 the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit 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, Wise, 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 Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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

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

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Mar

2025

How Donor-Advised Funds (DAF) Work

By Rebecca Lake | invest, Investing | Comments Off

A donor-advised fund, or DAF, is a tax-advantaged vehicle for charitable giving. Individuals, families, and organizations can establish donor-advised funds to further philanthropic efforts while supporting their favorite charities.

Here’s a closer look at what a donor-advised fund is used for, the pros and cons, and how to create one.

Key Points

• Donor-advised funds (DAFs) are charitable giving accounts, administered by sponsors, that allow donors to make tax-deductible donations that can be gifted to charities at a later time.

• DAFs can be established by individuals, families, trusts, corporations, estates, and foundations.

• Contributions to DAFs may include cash, stocks, real estate, cryptocurrency, and more.

• DAFs offer flexibility in charitable giving, allowing donors to recommend how funds are used and invested.

• Potential disadvantages include lack of donor control, fees, and the irrevocability of contributions.

🛈 While SoFi does not offer Donor Advised Funds at this time, we do offer a range of online investing services.

What Is a Donor-Advised Fund?

A donor-advised fund is a separately identified fund or account that exists for the purpose of making charitable donations to eligible organizations. In effect, they’re a sort of charitable investment account. They’re important funding sources for nonprofits that rely on public support via donations or charitable giving.

Donor-advised funds may be established by:

• Individuals and families

• Trusts

• Corporations

• Estates

• Foundations

Multiple donors may contribute to a donor-advised fund, and a third party, (or, the sponsor) administers and oversees it – hence the “donor-advised” moniker. This third party is responsible for making grants to eligible charities from donated funds.

Definition and Purpose

A donor-advised fund, most simply, is a private investment account that’s used exclusively to make charitable donations.

Donor-advised funds may be established to support a variety of 501(c)3 organizations. A 501(c)3 is a tax-exempt organization, as defined by the Internal Revenue Service. Examples of organizations that are supported by donor-advised funds could include:

• Colleges and universities

• Hospitals and healthcare organizations

• Religious organizations

• Animal welfare agencies

• Humanitarian organizations

• Environmental charities

• Disaster relief organizations

Under the Internal Revenue Code (IRC), tax-exempt purposes include “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.”

Key Players Involved

The key players in a donor-advised fund are the sponsors, donors, and charities that receive donations. More specifically:

• Sponsors are the organizations that administer the fund.

• Donors are the individuals or entities who make contributions to the fund.

• Receiving charities are eligible nonprofits, as defined by the IRS, per the information above.

When you make contributions to a donor-advised fund, the sponsor manages them on your behalf. You can request which charitable causes to fund with your donation — though this may ultimately be decided by the sponsor — and when donations should be distributed.

Benefits of Using a Donor-Advised Fund

You might wonder why someone would establish or contribute to a donor-advised fund when they could make direct charitable contributions to an organization instead. Answering that question is easier when you consider the benefits offered by donor-advised funds, which can include tax advantages, flexible giving, and more.

Tax Advantages

A donor-advised fund offers an immediate tax deduction for contributions. The deduction applies whether you donate cash or another type of asset, including publicly-traded securities, like stocks.

You’ll need to itemize deductions on the Schedule A tax form to write off donations to donor-advisor funds. That’s one of the main things to know about charitable donations and taxes.

Generally, the charitable deduction limit is as follows:

• Up to 60% of adjusted gross income (AGI) for cash donations

• Up to 30% of adjusted gross income (AGI) for noncash donations

Deductions reduce your taxable income for the year. Claiming deductions for donor-advised fund contributions could help push you into a lower tax bracket when it’s time to file your return.

Flexibility in Charitable Giving

Donor-advised funds allow for flexibility in deciding where your donations may go. While the sponsor has legal control over assets in the fund, donors can make recommendations on how the funds should be used.

You can make contributions at your own pace, and you can choose the recipient charities at a later time. Donor-advised funds may accept a variety of financial gifts, including cash, stock, real estate, and even noncash or alternative assets, such as cryptocurrency.

Investment Growth Potential

Donor-advised funds give donors a different avenue through which to make investments, and to provide some guidance about how money in the fund should be invested. Investment growth within a DAF is tax-free, so every additional penny your money earns can go directly to the charity or charities you prefer. Note that some DAFs may require regular distributions of funds, which can influence how long assets have to grow.

Potential Disadvantages of Donor-Advised Funds

Donor-advised funds can have drawbacks, both for donors and for the charities that receive donations through them. The main drawbacks for charities are a lack of transparency surrounding donations and potential delays, should donors choose to allow contributions to grow before funds are released. Further, donor-advised funds have been criticized as a tool that can be used by the wealthy to secure tax advantages – the IRS, in recent years, has released new regulations to mitigate that sort of potential abuse.

For donors, the disadvantages can include:

• Lack of control: While donors may make recommendations about investments or which charities should receive funds, the sponsor has the final say.

• Fees and minimums: Donor-advised funds can charge annual fees and other fees, which donors are responsible for paying. Some funds may require a minimum contribution of $1 million or more.

• No reversals: Once you contribute to a donor-advised fund the money must remain in the fund until it’s disbursed to charity. You can’t make a contribution and take it back later.

Setting Up and Contributing to a DAF

Setting up a DAF is simple enough. You need to find a sponsor, open your account, and make a contribution. Here’s more on how the process works.

Choosing a Sponsoring Organization

Several types of organizations can sponsor donor-advised funds, such as public foundations and 501(c)3 organizations associated with a brokerage.

Your goals related to charitable giving may determine which option you choose. If you’re primarily interested in funding local charities, for instance, you might select a community organization that administers a donor-advised fund. On the other hand, if you’d like to have access to a wider range of charities you might consider a DAF offered in association with a brokerage.

Opening an Account

You’ll need to complete the necessary paperwork to open your account once you’ve selected a sponsoring organization. Along with your personal information, you may need to specify, among other things:

• Which charities you’d like to support

• How you’d like contributions to be invested

• The identity of the sponsor

Once the paperwork is complete you can move on to the final step, and begin funding your account.

Contribution Types and Limits

You can decide what form your contributions to a donor-advised fund should take. The options can include, but are not limited to:

• Cash

• Stocks, bonds, and mutual funds

• Traditional IRA or 401(k) assets

• Cryptocurrency

• Real estate

• Private business interests

The fund sponsor should be able to tell you what the minimum contribution is (often around $5,000), if any, and whether there’s any upper limit on how much you can contribute annually. Keep in mind that with any contributions you make, you can only deduct them up to the limit allowed by the IRS.

Donor-Advised Fund vs. Private Foundation

A private foundation can be another vehicle for making charitable donations. Private foundations are 501(c)(3) organizations, and can be established by corporations, but they’re often used by families and wealthy individuals to fund philanthropic activity.

There are several differences to note between the two.

Donor-Advised Fund	Private Foundation
Donors make recommendations about how contributions to the fund should be invested and distributed to charities.	Donors have more control of investment decisions and how contributions are distributed.
Cash donations are deductible up to 60% of AGI; noncash donations are deductible up to 30% of AGI.	Cash donations are deductible up to 30% of AGI; noncash donations are deductible up to 20% of AGI.
No annual payout is required.	Minimum annual payout of 5% of net asset value is required.

Generally speaking, a donor-advised fund usually requires less paperwork and is less costly to establish. It’s also easier to maintain privacy, since you can keep your name as a donor confidential if you prefer. Private foundations, on the other hand, are more time- and cost-intensive to create. Privacy is limited as foundations are required to file public tax returns.

In terms of the difference between nonprofits vs. foundations, they can both be established as tax-exempt, 501(c)3 organizations. However, nonprofits and foundations may have different underlying goals, tax implications, and more.

The Takeaway

Donor-advised funds can offer an avenue for giving if you’re looking for charities to support. You’ll need to have sufficient capital to make an initial contribution but the tax advantages can be substantial. And you can still make contributions directly to qualify for a tax break if you don’t meet the minimum requirements for a DAF.

FAQ

Are donations to a donor-advised fund tax-deductible?

Donating to a donor-advised fund allows you to qualify for an immediate tax deduction. You can deduct cash donations up to 60% of your AGI, or noncash donations up to 30% of your AGI.

Can you name a successor for your donor-advised fund?

Yes, you can name a successor for your donor-advised fund. You may be prompted to do so at the time that you open your account and complete the initial paperwork. A successor essentially inherits the fund from you when you pass away.

What are the typical fees associated with a donor-advised fund?

Donor-advised funds can charge annual or administrative fees. These fees are typically assessed as a percentage of your account balance. The higher your balance, the lower the fee might be.

About the author

Rebecca Lake

Photo credit: iStock/miniseries

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q324-009

Mar

2025

Does Switching Bank Accounts Affect Credit Score?

Does Switching Bank Accounts Affect Your Credit Score?

By Rebecca Lake | Family Finances, money | Comments Off

Closing a checking or savings account at one bank and opening a new one at a different bank won’t affect your credit score because banks don’t check your credit or report your banking activity to the major credit reporting bureaus.

That said, there are some instances where banking activity may influence credit scores indirectly. So let’s take a look at how things play out when you are changing bank accounts.

Key Points

• Switching bank accounts does not affect your credit score as banks do not report to credit bureaus.

• Negative balances or overdrafts reported to ChexSystems can hinder opening new accounts.

• Closing a credit card with the same bank may affect your credit score.

• Banks might check your ChexSystems report instead of your credit when opening new accounts.

• Multiple bank accounts opened do not impact your credit score as they are not reported to credit bureaus.

Will Switching Banks Be Visible on Your Credit File?

No. Your banking history is not reported to the three consumer credit bureaus (Equifax, TransUnion, and Experian), so switching banks will not be visible on your credit file.

While banks do track and report their customers’ financial activity, they report it to a different agency, which is called ChexSystems. Your ChexSystems report will include your past savings and checking account history, as opposed to your credit history. This may include negative information, such as any unpaid negative balances (from overdrafting), frequent overdraft fees, and bounced checks.

Having negative information on your ChexSystems report won’t impact your credit, but it could make it harder to open a new savings or checking account, since banks will typically pull your ChexSystems report when you apply for a new account.

Your credit reports, by contrast, contain information relating to credit accounts, including any credit cards or loans you have. It will include:

• Personal information, such as your name, date of birth, and Social Security number

• Credit accounts, including creditor names, account numbers, balances, and payment history

• Credit inquiries

• Public records and collection accounts

The information in your credit reports is used to calculate your credit scores, including your FICO® Scores. Lenders will typically check your credit scores when deciding whether to approve you for a loan or line of credit. Generally, the higher your score, the more likely you are to be approved for credit, and the better the rates and terms will be.

Does Switching Current Accounts Affect Your Credit Score?

Opening a new bank account and closing an old account does not affect your credit rating, as long as the account that’s closed is in good standing and you transfer any autopayments to your new bank account. There could potentially be credit score implications, however, if you’re shuttering the account with a negative balance, you forget to switch your autopay transactions, or you’re closing a credit card with the bank at the same time.

Here’s a closer look at three scenarios in which closing a bank account could indirectly impact your credit.

• Negative bank account balances: The bank won’t report a negative balance due to an overdraft or unpaid fees to the credit bureaus, However, if your account has been closed because of an unpaid negative balance, it could go into collections. The collection agency could then take action against you, including reporting the delinquent debt to the credit bureaus and suing you for the balance due. Delinquencies, collection accounts, and judgments can all show up on your credit reports and harm your score.

Missing loan or credit card payments: If you close a checking account that you were using to automatically pay credit accounts (such as your credit card, auto loan, or student loans) and don’t switch those payments to a new account, you could miss a payment. Late or missed credit card or loan payments could be reported to the credit bureaus and have a negative impact on your scores.

• You close a credit card at the same time: If you have a credit card with the same bank and close both your bank account and credit card account simultaneously, it could negatively impact your credit. Here’s why: Closing a credit card could lower the amount of overall credit you have versus the amount of credit you’re using (your credit utilization ratio), which could impact your credit scores. Also, closing a credit card account you’ve had for a long time may impact the length of your credit history, which is another factor used to calculate credit scores.

Will Switching Banks Affect Your Chances of Getting a Loan?

No. Switching banks should not affect your chances of getting a loan, since it won’t impact your credit scores. Closing an old bank account won’t get reported to the credit bureaus. And when you open a new bank account, the financial institution won’t likely run a credit check. Instead, the bank or credit union will screen your banking history through ChexSystems, which isn’t connected to your credit file.

Applying for a new credit card or loan, on the other hand, could impact your credit. When you apply for a new line of credit, the lender will typically run a hard inquiry or a “hard pull” on your credit file to determine how much risk you pose as a borrower. Hard inquiries show up on your credit report and can have a small negative impact on your scores in the short-term.

Can Your Credit Score Be Affected If You Open Multiple Bank Accounts?

No. Opening multiple bank accounts will not affect your credit scores. When you open a bank account, the financial institution won’t usually run a credit check but will instead screen you through ChexSystems, which is an entirely different reporting agency.

Your credit scores are based on credit accounts, such as credit cards or loans, rather than bank accounts. Things like how much money you keep in checking and savings or how many bank accounts you have don’t affect your credit rating. What does matter to your score is how good a record you have of borrowing and repaying funds in a timely fashion.

Steps That Can Positively Impact Your Credit

If you’re concerned about your credit, opening and closing bank accounts likely won’t have any effect (positive or negative), since your banking activity isn’t reported to the consumer credit bureaus. However, there are other steps you can take to add positive information to your credit reports and, in turn, help you build your credit. These include:

• Consistently pay your bills on time. Payment history accounts for 35% of your FICO Score, so it’s a good idea to set up autopay for all of your monthly credit payments so you never miss a due date.

• Pay down credit card balances. This can help lower your credit utilization rate, or ratio, which measures how much revolving credit you’re using relative to your total credit limits. Credit utilization accounts for up to 30% of your FICO credit score. The lower your credit utilization, generally the better.

• Keep older credit accounts open. While it’s fine to close unused bank accounts, the same can’t be said of unused credit accounts. Closing a credit card can negatively affect your credit by reducing the amount of revolving credit available to you (instantly increasing your credit utilization rate). It also shortens your credit history, and length of credit history is also factored into your scores.

• Review your credit reports. Inaccuracies in credit reports are uncommon but may show up from time to time, and depending on the information involved, could negatively affect your credit score. You can get copies of your credit reports free from AnnualCreditReport.com.

The Takeaway

Opening a new checking and/or savings account could be a good move if your current bank no longer meets your needs. And you can take comfort in knowing that closing an old checking or savings account and opening new ones at a different bank won’t impact your credit, since banks don’t run credit checks or report your banking activity to the consumer credit bureaus.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

Is switching banks bad for your credit?

No. Switching banks won’t impact your credit, since banks don’t run credit checks or report your activity to the consumer credit bureaus.

Is switching bank accounts a good idea?

Switching bank accounts can be a good idea if it allows you to get a better interest rate on savings (and possibly checking), reduces banking fees, and/or gives you more perks and better access to your money. Before changing banks, it’s helpful to compare features, benefits, rates, and fees to find the right banking option for your needs.

Will getting a new bank account affect my credit score?

No. Opening a new bank account and closing an old one won’t impact your credit. Banks do not report your activity to the consumer credit bureaus. Instead, they report your financial activity (like opening and closing accounts, overdrafts, and bounced checks) to ChexSystems, the banking reporting agency. Your ChexSystems report does not appear in your credit file.

About the author

Rebecca Lake

Photo credit: iStock/Passakorn Prothien

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

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 every 31 calendar days.

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 the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, 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 the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit 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, Wise, 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 Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. 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.

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.

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

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.

SOBK0124037

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How does an education savings account work?

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Increase your savings with a limited-time APY boost.*

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FAQ

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

Can I write off a CD early withdrawal penalty?

How Donor-Advised Funds (DAF) Work

What Is a Donor-Advised Fund?

Definition and Purpose

Key Players Involved

Benefits of Using a Donor-Advised Fund

Tax Advantages

Flexibility in Charitable Giving

Investment Growth Potential

Potential Disadvantages of Donor-Advised Funds

Setting Up and Contributing to a DAF

Choosing a Sponsoring Organization

Opening an Account

Contribution Types and Limits

Donor-Advised Fund vs. Private Foundation

The Takeaway

FAQ

Are donations to a donor-advised fund tax-deductible?

Can you name a successor for your donor-advised fund?

What are the typical fees associated with a donor-advised fund?

Does Switching Bank Accounts Affect Your Credit Score?

Will Switching Banks Be Visible on Your Credit File?

Does Switching Current Accounts Affect Your Credit Score?

Increase your savings with a limited-time APY boost.*

Will Switching Banks Affect Your Chances of Getting a Loan?

Can Your Credit Score Be Affected If You Open Multiple Bank Accounts?

Steps That Can Positively Impact Your Credit

The Takeaway

FAQ

Is switching banks bad for your credit?

Is switching bank accounts a good idea?

Will getting a new bank account affect my credit score?

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