When shopping for a new health insurance policy — or when your employer introduces a new health plan — you might wonder what certain health insurance terms mean.
In this guide, you’ll discover health insurance terminology for beginners and anyone who’s ever been confused about a policy, so you can make informed decisions.
Key Points
• Accident-only policies cover only injuries from accidents, not illnesses.
• Benefits refer to the health services covered by insurance plans.
• A claim is an itemized bill submitted to the insurance company for payment.
• Coinsurance is the percentage of costs the insured pays after the deductible.
• The out-of-pocket maximum sets the limit on annual healthcare expenses.
Top Health Insurance Terms to Know
Discover the health insurance definitions that can help you better utilize health insurance for you and your family.
Accident-Only Policies
These policies pay only in cases that were due to an accident or injury.
Benefits
These are the health care services covered by the insurance plan for an individual. Your health benefits might also be called a “benefits package.”
Claim
An itemized bill that shows all of the services and procedures that were provided to the member.
Coinsurance
This refers to the percentage of the medical charge you must pay out of your own pocket after meeting your deductible. The rest will be paid by your health insurance company. For instance, if you have a 15% coinsurance plan, you would pay 15% of each medical bill (after paying the full deductible), and the insurer would cover the rest.
Contract
In most cases, this means the insurance policy, which is a contract between the insurance company and the policyholder.
Copayment
The amount you pay out of pocket when you receive medical care or a prescription drug. A copayment is typically paid in person at the doctor’s office.
Deductible
This refers to the amount you must pay out of pocket before your insurance starts paying some of your health care expenses. The deductible resets at the beginning of the year or when you enroll in a new health insurance plan.
If your deductible is $2,000, your health insurance plan won’t cover any services until you have paid $2,000 out of pocket for the year. Someone with a high deductible and lots of medical costs could consider getting help in the form of medical loans, which are personal loans for medical and dental procedures.
If you are unable to work because of an illness or injury, the insurance company pays for lost wages. You’ll receive a portion of your income until you are able to return to work. Each policy defines what constitutes a “disability,” so you’ll need to meet those requirements and submit medical paperwork before receiving payment.
Health Insurance
Health insurance terminology 101: This is a contract that requires your health insurer to pay some or all of your health care costs in exchange for a premium.
Health Maintenance Organization (HMO)
An HMO is a health plan that provides health care services to members through a network of doctors, hospitals, and other health care providers.
HMOs are popular alternatives to traditional health care plans because they usually have lower-cost premiums while still offering a variety of services.
Health Savings Account (HSA)
This is pretax money you set aside to pay for qualified medical expenses. You and your employer may contribute.
One benefit of an HSA is that funds roll over if you don’t spend them by the end of the year.
Sometimes referred to as a fee-for-service plan, an indemnity plan allows you to go to any physician or provider you want, but requires that you pay for the services yourself and file claims in order to get reimbursed.
Mandated Benefits
This refers to the health care benefits that state or federal law say must be included in health care plans. Mandated health insurance benefit laws may require plans to cover substance abuse treatment or maternity services; cover treatment by providers like chiropractors, acupuncturists, and midwives; or include dependents and domestic partners.
Out-of-Pocket Maximum
This is when you seek out services from providers who aren’t in your HMO’s or PPO’s network. Usually, HMOs will only pay for care received within its network. If you’re in a PPO plan, you will have to pay more to receive services outside the PPO’s network.
Out-of-Network Services
This is when you seek out services from providers who aren’t in your HMO’s or PPO’s network. Usually, HMOs will only pay for care received within its network. If you’re in a PPO plan, you will have to pay more to receive services outside the PPO’s network.
Preexisting Condition
This health insurance term refers to a medical problem or illness you had before applying for health care coverage. If you have a preexisting condition, it’s a good idea to shop around and educate yourself when choosing an individual health plan.
Preferred Provider
This refers to a provider who has a contract with your health plan to provide services to you at a discount. If you have a favorite doctor, you might want to see if they are a preferred provider or “in network” for any new insurance plan.
When you’re looking to find a new physician, choosing a “preferred provider” found via the plan’s website will help keep medical costs down.
Your health insurance or plan may have preferred providers who are also “participating” providers. Participating providers can also have a contract in place with your health insurer, but you may have to pay more.
Preferred Provider Organization (PPO)
PPO plans provide more flexibility than HMOs when choosing a doctor or hospital. They also feature a provider network, but have fewer restrictions on seeing out-of-network providers.
PPO insurance will pay if you see a provider out of the network, though it may be at a lower rate.
PPO plans usually cost more than HMO plans.
Premium
This is the amount paid to the insurance company to obtain or maintain an insurance policy. Usually it’s a monthly fee.
Provider Network
This is a list of all the doctors, specialists, hospitals, and other providers who agree to provide medical care to the members of an HMO or PPO.
Waiting Period
This is the time an employer may make employees wait before they are eligible for coverage under the company’s insurance plan.
The Takeaway
Do you know your HMO from your PPO and HSA? Have you looked closely at copays, deductibles, and out-of-pocket maximums? Knowing health insurance terms can help you make an informed decision when looking at health insurance policies.
When the unexpected happens, it’s good to know you have a plan to protect your loved ones and your finances. SoFi has teamed up with some of the best insurance companies in the industry to provide members with fast, easy, and reliable insurance.
Find affordable auto, life, homeowners, and renters insurance with SoFi Protect.
Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.
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.
Whether you’re buying a home or shopping for new insurance coverage, it helps to understand basic homeowners insurance terms before you choose a policy.
The jargon used by real estate agents, lenders, and insurance professionals can be mystifying. It doesn’t help that terms for various types of homeowners insurance coverage often sound interchangeable but aren’t. Or that different lenders may have different requirements for the kinds of insurance coverage a borrower must have. Or that homeowners may require various types of coverage, and limits, based on their individual circumstances.
Need some clarity? Consider this homeowners insurance glossary a go-to resource.
Key Points
• Homeowners insurance covers home structure, personal property, and liability, distinguishing it from mortgage and renters insurance.
• Blanket insurance covers multiple properties under one policy, while flood insurance addresses water damage from natural sources.
• Hazard insurance covers specific perils like fire or theft, requiring separate policies for other hazards.
• Title insurance protects against ownership disputes, ensuring a clear property title.
• Rental property insurance covers repairs, tenant injuries, and lost income, essential for landlords.
Blanket Insurance
Blanket insurance enables a property owner to cover multiple pieces of property with one policy. For example, a landlord who has many rental units might take out a blanket policy to insure them all.
A homeowners insurance policy also may be referred to as blanket insurance coverage because it offers more than one type of protection. (A standard policy may combine dwelling, personal property, and liability coverage, for example.)
A standard homeowners policy typically offers some coverage for unexpected water damage due to a plumbing malfunction or broken water pipe. But most standard homeowners policies do not cover damage caused by an overflowing body of water, like a creek, bay, or river. That kind of protection usually requires a separate flood insurance policy.
Some property owners may be required to carry flood insurance, especially if they live in a high-risk area.
Hazard Insurance
When you hear the term “hazard insurance,” it’s typically referring to the portion of a homeowners policy that kicks in when someone suffers a loss caused by certain hazards or “perils,” such as fire, hail, theft, a falling tree, or a broken pipe.
Not every hazard is covered by a standard policy, however. Homeowners usually need separate insurance to cover damage caused by a flood, earthquake, or sinkhole.
A typical homeowners policy covers the physical structure of an insured home and other structures on the property, personal belongings in the home, and additional living expenses if the owner can’t stay in the home after damage. (However, it is usually necessary to purchase separate insurance to cover costs related to an earthquake, flood, or sinkhole.)
A policy also provides liability coverage, which can protect you, as the homeowner, if you’re legally responsible for another person’s injury or property damage when it occurs on your property or from your activities. For example, if someone is injured because you neglected to fix your front porch step, liability insurance may help pay for that person’s medical bills. The liability portion of your policy also may provide protection if your pet bites a person or another animal, whether the bite occurs in your own yard or somewhere else.
There are no federal or state laws that require the purchase of a homeowners policy, but if you have a mortgage, you can expect your lender to require proof that you carry this type of insurance.
Homeowners insurance is not the same thing as mortgage insurance. Homeowners insurance mainly protects the homeowner when something unexpected occurs; mortgage insurance is designed to protect the lender if a borrower can’t make mortgage payments.
Homeowners insurance is also quite different from the protection offered by a home warranty. A home warranty is a service contract that generally covers the cost of repairing or replacing some appliances and major home systems when they malfunction, but home warranties are not required by lenders.
Mortgage Insurance
Mortgage insurance protects lenders against the possibility that a borrower might fail to make the payments on a home loan.
When a homebuyer appears to have a higher risk of defaulting, mortgage insurance can serve as a backup to reassure the lender that if the borrower fails to make the mortgage payments, the loan still will be paid. The lender doesn’t pay for this insurance — the borrower does.
Not everyone has to get mortgage insurance. But if you have a conventional loan and your down payment is less than 20% of the purchase price, you’ll probably be required to get private mortgage insurance, commonly called PMI — at least until you have 20% of the principal balance paid off.
The rules are a bit different for those who have a loan backed by the Federal Housing Administration (FHA) or Department of Agriculture (USDA). With an FHA loan, borrowers are required to pay a qualified mortgage insurance premium each month no matter how much they put down. USDA loans have a similar requirement, but the cost is referred to as a “guarantee fee.”
Renovation Insurance
Homeowners who are planning to make major renovations or repairs to a property may want to check with their insurance company to see what their homeowners policy covers.
Depending on the size of the project, they may decide it makes sense to add “dwelling under renovation,” “dwelling under construction,” or “builder’s risk” insurance to fill any coverage gaps. It can help with costs if the homeowner or someone else is hurt during a renovation, for example, or if the home or a nearby property is damaged.
If professionals will be doing the renovation, it’s also a good idea to ask for proof of their insurance coverage and to make a copy just in case there are problems. Contractors and subcontractors should have liability, property, and worker’s compensation insurance.
If the home will be unoccupied for an extended period while the work is being done, owners may want to consider adding vacant dwelling insurance during that time. (Vacant dwelling coverage also might offer protection for those who have moved into a new home but haven’t yet sold their old home.)
Owners who are renting a home to someone else may want to look at the pros and cons of purchasing rental property insurance vs. a standard homeowners insurance policy. Besides covering repairs if the home or other structures on the property are damaged, rental property insurance may cover the owner if a tenant is injured and makes a claim. An owner also might be able to receive reimbursement for lost income if the property is deemed uninhabitable due to a covered loss.
What about insurance for short-term rentals like Airbnb? Business use of a house is usually not included in homeowners insurance coverage. Home-sharing insurance may provide liability coverage but not damage to the home or coverage of personal belongings. You may need an add-on to your homeowner’s insurance.
Renters Insurance
If you’re a renter, renters insurance will cover your possessions if something is stolen or damaged. And it may help with certain costs if someone is injured in the rental home, or help pay for accommodations if the home is damaged and you have to move out temporarily.
Though renters insurance is mostly meant to protect a tenant who is leasing a property, it also can have benefits for the landlord. This is why some landlords require tenants to have renters insurance when they sign a lease. For the landlord, renters insurance can help take care of some of the things a homeowners policy or landlord policy doesn’t, including damage from a renter’s pet.
Title Insurance
When you buy title insurance, the title company searches for any ownership issues that might cause legal problems after you close on the property. It will look for any liens that might remain on the property, for example, or clerical problems that weren’t caught and fixed in the past.
If there aren’t any problems (or the problems are remedied), the title company will insure your claim to the property’s title. And if something does come up later — let’s say there’s a lawsuit because the title search missed something — the policy should cover the costs of resolving the problem.
There are two types of title insurance: Lenders title insurance protects the mortgage company from incurring any costs in a title dispute. Owner’s title insurance protects the homeowner. The mortgage company likely will require that you purchase lenders’ title insurance. Owner’s title insurance is optional, but once you buy it, the coverage lasts as long as you own your home.
Title insurance is not included in a homeowners insurance policy.
Umbrella Insurance
A separate liability insurance policy, umbrella insurance goes beyond the liability coverage provided by a standard homeowners or auto insurance policy.
It’s designed to expand your protection if a claim or lawsuit is filed against you, and it only kicks in if you exceed the liability coverage limit you have with your homeowner’s insurance policy.
If you own rental property, employ a housekeeper or gardener, have a trampoline or pool — or if you have substantial assets you wish to protect — you may want to talk to your insurance company about the added risk and whether umbrella insurance is right for you.
The Takeaway
When you’re buying a home or shopping for a new homeowners insurance policy, there’s a lot to manage. Understanding homeowners insurance terms is key in protecting this major investment. Shopping for homeowners insurance often requires considering several options, from the amount of coverage to the kind of policy to the cost of the premium.
If you’re a new homebuyer, SoFi Protect can help you look into your insurance options. SoFi and Lemonade offer homeowners insurance that requires no brokers and no paperwork. Secure the coverage that works best for you and your home.
Find affordable homeowners insurance options with SoFi Protect.
Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.
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.
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.
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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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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.
After you purchase a new home, there are many things to budget for, including moving costs, new furniture, and ongoing expenses such as your mortgage. Although it may seem like many of the significant expenditures are out of the way once you close on a property, there are additional costs that can add up.
To avoid financial surprises, it’s wise to jot down and budget for all of the extra expenses you will encounter when you move into your new place. To help you organize your finances, here are the things to budget for after buying a house.
Moving-Out Expenses to Budget for
Before you take up residence in your new home, you must move all of your things. Even if you pack and move all your belongings yourself, you’ll still have to spend on things like boxes, packing materials, and a truck. And if you use movers, it will cost you even more.
There are three main options for moving your belongings:
• Renting a truck and doing it yourself. It’s more cost efficient than using professional movers, but DIY moving yourself still adds up. You’ll have to pay for the truck rental fee, gas, and damage protection. If you’re moving across the country, you may also have to factor in the costs of shipping some of your items. Even though you can enlist your friends and family to help you do the heavy lifting, the cost of moving yourself can still be significant, and it’s a lot of work.
• Hiring movers. If you decide to use professional movers, it’s wise to shop around to find the best price. Here’s why: For moves under 100 miles away, the national average cost of moving is $1,400, and it ranges from $800 to $2,500. If you’re moving long distance, the average cost can be as high as $2,200 to $5,700. To cut costs, you can do your own packing, which may save you money.
• Moving your things in a storage container. Another option is to use a hauling container — you load your things in it, and the container company moves it to your new location. This usually costs between $500 and $5,000, depending on the distance and how much stuff you’re moving. Long-distance moves will usually cost more than local ones.
Moving Supplies
If you decide to go the DIY moving route, you will need to buy boxes, bubble wrap, labels, and tape. And you likely have more items to wrap and box up than you think, which requires even more supplies.
Cleaning Supplies
You’ll probably want to clean your current property before you move out, and you’ll definitely want to clean the new place when you move in. That means buying mops, sponges, cleaning solutions, and paper towels. You may also want to get the carpets cleaned or hire a professional house cleaner if the place needs a deep cleaning.
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10 Common Expenses After Buying a Home
Once the move is done, there are other expenses you’ll need to account for as you settle into your new abode. Here are a few things to budget for after buying a home.
Furniture and Appliances
You’ll likely bring some furniture and decor from your old place, but you’ll probably want to purchase some new things as well. For example, if the appliances are outdated, you might want to upgrade to new ones. And you may have more rooms to furnish, which requires additional furniture.
Consider opening a savings account for the new items you want to purchase. It can also help pay for any unexpected costs, such as having to replace a hot water heater that breaks.
Mortgage Payments
As a homeowner, every month you will making a mortgage payment that typically includes:
• The principal portion of the payment. This is the percentage of your mortgage that reduces your payment over the life of the loan. The more you pay toward principal, the less you will have to pay in interest.
• The interest. This is the amount you pay to borrow funds from the bank or lender to purchase your home.
If you are using an escrow account to pay your mortgage, other things may be included in your payment, such as your property taxes, insurance, and private mortgage insurance. This guide to reading your mortgage statement can help you understand all the costs involved in your mortgage payment.
Property Taxes
Property taxes are the taxes you pay on your home. In many cases, these taxes are the second most significant expense after your mortgage. Property taxes are based on the value of your home, which is typically governed by your state. The county you live in collects and calculates the sum due. Usually, property tax calculations are done every year, so the amount you owe may fluctuate annually.
Homeowners Insurance
Homeowners insurance helps protect your home from damage or destruction caused by events like a fire, wind storm, or vandalism. It can also protect you from lawsuits or property damages you are liable for. If someone slips and falls on your sidewalk, for instance, homeowners insurance will pay for the injured person’s medical bills and the legal costs if they decide to sue you.
The cost you pay for this coverage will vary by the type and amount of coverage you select.
Private Mortgage Insurance (PMI)
For borrowers who can’t afford a down payment that’s 20% of the mortgage value, lenders usually require private mortgage insurance (PMI). This type of coverage is designed to protect the lender if you default on your mortgage payments.
PMI can cost as much as a few hundred dollars per month, depending on the sum you borrow.
HOA Dues
This is a Homeowner’s Association fee, which goes toward the upkeep of property in a planned community, co-op, or condo. The amount can range from a couple of hundred dollars a year to more than $2,000, depending on the amenities you’re paying for (like a pool and landscaping). You typically pay HOA fees monthly, quarterly, or annually.
Utilities
Your utility payments include water, gas, electric, trash, and sewer fees. Some bills like water and electricity are based on the amount you use every month, so monitoring your electric and water usage, like taking short showers and turning lights off, can help lower your cost. Other payments, such as your trash or recycling, might be a fixed amount.
Lawn Care
Maintaining the curb appeal of your home requires landscape services and lawn care. If you choose to mow your own lawn, you may need to factor in the purchase of a mower, which can cost about $1,068 on average. If you hire a lawn service to cut your grass, you may pay $25 to $50 a week.
Pest Control
Pests, such as ants, ticks, rodents, or mice, can wreak havoc on your home and your family’s health. For these reasons, many homeowners hire a pest control company to prevent the infestation of pests around their homes. The company’s initial visit may cost between $150 to $300, then $45 to $75 for every follow-up.
Home Improvement Costs
As a homeowner, there are likely things you want to change about your house. From painting the walls to a complete kitchen renovation, transforming your property can add to the cost of owning a home. According to the HomeAdvisor 2023 State of Home Spending Report, homeowners spend an average of $9,542 on home improvement each year.
Additionally, as the features of your home age, you will need to replace and repair them accordingly.
Common Mistakes After Buying a Home
One of the most common mistakes people make when buying a home is spending more than they can afford. For instance, you may forget to factor in utilities, lawn care, HOA fees, costs of upkeep, and other hidden expenses that come with owning a home. It’s crucial to do your research to determine extra costs and add them up before you move forward with purchasing a property.
Another mistake new homeowners make is taking on too many DIY projects. TV shows can make home renovations look easy. However, many of these projects require professionals who know what they are doing. Attempting a home improvement project could cost you more to fix than hiring a pro in the first place. In fact, about 80% of homeowners that attempt their own renovation projects make mistakes — some of them serious.
Unless you can afford an expert, you may want to rethink purchasing a home that requires a lot of renovation.
The 50/30/20 Rule
For help planning your budget as a homeowner, you can use the 50/30/20 rule, which breaks your budget into three categories:
• 50% goes to to needs
• 30% goes to wants
• 20% goes to to savings
That means you’ll be budgeting 50% of your income to go toward necessities such as housing costs, grocery bills, and car payments. Then 30% will go toward things you want, such as entertainment (movies, concerts), vacations, new clothes, and dining out. The remaining 20% goes towards saving for the future or financial goals such as home improvement projects.
Using a 50/30/20 budget rule is simple and easy. It allows you to see where your money is going and helps you save.
With so many things to budget for after buying a home, you may need to cut back on spending. Start by looking at your discretionary spending and think about where you can trim back. For example, instead of eating out regularly, you can cook more meals at home. Or perhaps you can put your gym membership on hold and do at-home workouts for a while to stay in shape physically and financially.
After you buy a house, there are many expenses you may not have accounted for, such as the cost of hiring movers; buying furniture; and getting your new place painted, cleaned, and ready to move into. Making a budget is vital to keep you on track financially, so you can enjoy your new home.
Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.
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FAQ
How much money should you have leftover after buying a house?
After buying a home, the amount you have left will vary depending on your financial situation. However, it’s a good idea to have at least three to six months of living expenses in reserve. That way, in case of an emergency, you can stay afloat financially.
Is it worth putting more than 20% down?
Putting more than 20% down on your home can help lower your monthly mortgage payment and interest because you’ll be borrowing less money. It also gives you more equity in your home from the beginning. But make sure you can afford to pay more than 20% in order not to stretch beyond your budget.
What’s the 50-30-20 budget rule?
The 50/30/20 rule means that you budget 50% of your expenses for needs (housing, groceries, loan payments), 30% for wants (entertainment, eating out, shopping), and 20% toward savings goals (retirement, renovations, new furniture).
About the author
Ashley Kilroy
Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.
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