May
25
2024
ACH Return Codes (R01 - R33): Understanding What They Mean and What to Do

ACH Return Codes (R01 – R33): Understanding What They Mean

By | Budgeting & Goals, money, Terminology | Comments Off on ACH Return Codes (R01 – R33): Understanding What They Mean

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.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


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.


💡 Quick Tip: Want to save more, spend smarter? Let your bank manage the basics. It’s surprisingly easy, and secure, when you open an online bank account.

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.

Recommended: What is Liquid Net Worth

More ACH Return Codes

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.

Recommended: Average Savings by Age

The Takeaway

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.

Need an easy way to receive payments when managing your personal banking?

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


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

FAQ

What 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..

Photo credit: iStock/Delmaine Donson

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

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

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

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

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

SOBK-Q224-1890250-V1

Read more
May
23
2024

What Is a Roth IRA and How Does It Work?

By | Budgeting & Goals, invest, Terminology | No Comments

A Roth IRA is an individual retirement account that allows you to contribute after-tax dollars, and then withdraw the money tax free in retirement. A Roth IRA is different from a traditional IRA, which is a tax-deferred account: meaning, you contribute pre-tax dollars — but you owe tax on the money you withdraw later.

Many people wonder what a Roth IRA is because, although it’s similar to a traditional IRA, the two accounts have many features and restrictions that are distinct from each other. Roth accounts can be more complicated, but for many investors the promise of having tax-free income in retirement is a strong incentive for understanding how Roth IRAs work.

Key Points

•   A Roth IRA is a retirement savings account that offers tax-free growth and tax-free withdrawals in retirement.

•   Contributions to a Roth IRA are made with after-tax dollars, but qualified withdrawals are not subject to income tax.

•   Roth IRAs have income limits for eligibility, and contribution limits that vary based on age and income.

•   Unlike traditional IRAs, Roth IRAs do not require minimum distributions during the account holder’s lifetime.

•   Roth IRAs can be a valuable tool for long-term retirement savings, especially for individuals who expect to be in a higher tax bracket in the future.

What Is a Roth IRA?

A Roth IRA is a retirement account for people who want to make after-tax contributions. The trade-off for paying taxes upfront is that when you retire, all of your withdrawals will be tax free, including the earnings and other gains in your account.

That said, because you’re making after-tax contributions, you can’t deduct Roth deposits from your income tax the way you can with a traditional IRA.

Understanding Contributions vs Earnings

An interesting wrinkle with a Roth IRA is that you can withdraw your contributions tax and penalty-free at any time. That’s because you’ve already paid tax on that money before initially depositing or investing it.

Withdrawing investment earnings on your money, however, is a different story. Those gains need to stay in the Roth for a minimum of five years before you can withdraw them tax free — or you could owe tax on the earnings as well as a 10% penalty.

It’s important to know how the IRS treats Roth funds so you can strategize about the timing around contributions, Roth conversions, as well as withdrawals.

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Roth IRA Eligibility

Technically, anyone can open an IRA account, as long as they have earned income (i.e. taxable income). The IRS has specific criteria about what qualifies as earned income. Income from a rental property isn’t considered earned income, nor is child support, so be sure to check.

There are no age restrictions for contributing to a Roth IRA. There are age restrictions when contributing to a traditional IRA, however.

How to Open a Roth IRA

Roth IRA Annual Contribution Limits

For 2024, the annual limit is $7,000, and $8,000 for those 50 and up. The extra $1,000 is called a catch-up provision, for those closer to retirement.

For 2023, the annual contribution limits for both Roth and traditional IRAs was $6,500, or $7,500 for those 50 or older. So, there was a $500 increase in contribution limits between 2023 and 2024.

Remember that you can only contribute earned income. If you earn less than the contribution limit, you can only deposit up to the amount of money you made that year.

One exception is in the case of a spousal Roth IRA, where the working spouse can contribute to an IRA on behalf of a spouse who doesn’t have earned income.

Other Roth IRA Details

Since Roth IRAs are funded with after-tax income, contributions are not tax-deductible. One exception for low- and moderate-income individuals is something called the Saver’s Credit, which may give someone a partial tax credit for Roth contributions, assuming they meet certain income and other criteria.

Note that the deadline for IRA contributions is Tax Day of the following year. So for tax year 2023, the deadline for IRA contributions is April 15, 2024. But, if you file an extension, you cannot further postpone your IRA contribution until the extension date and have it apply to the prior year.

Calculate your IRA contributions.

Get a head start on retirement planning with SoFi’s 2024 IRA contribution calculator.

money management guide for beginners

Roth IRA Income Restrictions

In addition, with a Roth there are important income restrictions to take into account. Higher-income individuals may not be able to contribute the full amount to a Roth IRA; some may not be eligible to contribute at all.

It’s important to know the rules and to make sure you don’t make an ineligible Roth contribution if your income is too high. Those funds would be subject to a 6% IRS penalty.

For 2023:

•   You could contribute the full amount to a Roth as long as your modified adjusted gross income (MAGI) was less than $138,000 (for single filers) or less than $218,000 for those married, filing jointly.

•   Single people who earned more than $138,000 but less than $153,000 could contribute a reduced amount.

•   Married couples who earned between $218,000 and $228,000 could also contribute a reduced amount.

For 2024 the numbers have changed and the Roth IRA income limits have increased:

•   For single and joint filers: in order to contribute the full amount to a Roth you must earn less than $146,000 or $230,000, respectively.

•   Single filers earning more than $146,000 but less than $161,000 can contribute a reduced amount. (If your MAGI is over $161,000 you can’t contribute to a Roth.)

•   Married couples who earn between $230,000 and $240,000 can contribute a reduced amount. (But if your MAGI is over $240,000 you’re not eligible.)

If your filing status is…

 If your 2023 MAGI is…

 If your 2024 MAGI is…

 You may contribute:
Married filing jointly or qualifying widow(er) Up to $218,000 Up to $230,000 For 2023 $6,500 or $7,500 for those 50 and up.
For 2024 $7,000 or $8,000 for those 50 and up.
$218,000 to $228,000 $230,000 to $240,000 A reduced amount*
Over $228,000 Over $240,000 Cannot contribute
Single, head of household, or married filing separately (and you didn’t live with your spouse in the past year) Up to $138,000 Up to $146,000 For 2023 $6,500 or $7,500 for those 50 and up.
For 2024 $7,000 or $8,000 for those 50 and up.
From $138,000 to $153,000 From $146,000 to $161,000 Reduced amount
Over $153,000 Over $161,000 Cannot contribute
Married filing separately** Less than $10,000 Less than $10,000 Reduced amount
Over $10,000 Over $10,000 Cannot contribute

*Consult IRS rules regarding reduced amounts.
**You did live with your spouse at some point during the year.

Advantages of a Roth IRA

Depending on an individual’s income and circumstances, a Roth IRA has a number of advantages.

Advantages of a Roth IRA

•   No age restriction on contributions. With a traditional IRA, individuals must stop making contributions at age 72. A Roth IRA works differently: Account holders can make contributions at any age as long as they have earned income for the year.

   * You can fund a Roth and a 401(k). Funding a 401(k) and a traditional IRA can be tricky, because they’re both tax-deferred accounts. But a Roth is after-tax, so you can contribute to a Roth and a 401(k) at the same time (and stick to the contribution limits for each account).

•   Early withdrawal option. With a Roth IRA, an individual can generally withdraw money they’ve contributed at any time, without penalty (but not earnings on those deposits). In contrast, withdrawals from a traditional IRA before age 59 ½ may be subject to a 10% penalty.

•   Qualified Roth withdrawals are tax-free. Investors who have had the Roth for at least five years, and are at least 59 ½, are eligible to take tax- and penalty-free withdrawals of contributions + earnings.

•   No required minimum distributions (RMDs). Unlike IRAs, which require account holders to start withdrawing money after age 73, Roth IRAs do not have RMDs. That means an individual can withdraw the money as needed, without fear of triggering a penalty.

Disadvantages of a Roth IRA

Despite the appeal of being able to take tax-free withdrawals in retirement, or when you qualify, Roth IRAs have some disadvantages.

•   No tax deduction for contributions. The primary disadvantage of a Roth IRA is that your contributions are not tax deductible, as they are with a traditional IRA and other tax-deferred accounts (e.g. a SEP IRA, 401(k), 403(b)).

•   Higher earners often can’t contribute to a Roth. Affluent investors are generally excluded from Roth IRA accounts, unless they do what’s known as a backdoor Roth or a Roth conversion. (There are no income limits for converting a traditional IRA to a Roth, but you’ll have to pay taxes on the money that goes into the Roth — though you won’t face a penalty.)

•   The 5-year rule applies. The 5-year rule can make withdrawals more complicated for investors who open a Roth later in life. If you open a Roth or do a Roth conversion at age 60, for example, you must wait five years to take qualified withdrawals of contributions and earnings, or face a penalty (some exceptions to this rule apply; see below).

Last, the downside with both a traditional or a Roth IRA is that the contribution limit is low. Other retirement accounts, including a SEP-IRA or 401(k), allow you to contribute far more in retirement savings. But, as noted above, you can combine saving in a 401(k) with saving in a Roth IRA as well.

Roth IRA Withdrawal Rules

Because Roth IRA withdrawal rules can be complicated, let’s review some of the ins and outs.

Qualified Distributions

Since you have already paid tax on the money you deposit, you’re able to withdraw contributions at any time, without paying taxes or a 10% early withdrawal penalty.

For example, if you’ve contributed $25,000 to a Roth over the last five years, and your investments have seen a 10% gain (or $2,500), you would have $27,500 in the account. But you could only withdraw up to $25,000 of your actual deposits.

Withdrawing any of the $2,500 in earnings would depend on your age and the 5-year rule.

The 5-Year Rule

What is the 5-year rule? You can withdraw Roth account earnings without owing tax or a penalty, as long as it has been at least five years since you first funded the account, and you are at least 59 ½. So if you start funding a Roth when you’re 60, you still have to wait five years to take qualified withdrawals.

The 5-year rule applies to everyone, no matter how old they are when they want to withdraw earnings from a Roth.

There are some exceptions that might enable you to avoid owing tax or a penalty.

Non-Qualified Withdrawals

Non-qualified withdrawals of earnings from a Roth IRA depends on your age and how long you’ve been funding the account.

•   If you meet the 5-year rule, but you’re under 59 ½, you’ll owe taxes and a 10% penalty on any earnings you withdraw, except in certain cases.

•   If you don’t meet the 5-year criteria, meaning you haven’t had the account for five years, and if you’re less than 59 ½ years old, in most cases you will also owe taxes and a 10% penalty.

There are some exceptions that might help you avoid paying a penalty, but you’d still owe tax on the early withdrawal of earnings.

Exceptions

Again, these restrictions apply to the earnings on your Roth contributions. (You can withdraw direct contributions themselves at any time, for any reason, tax and penalty free.)

You can take an early or non-qualified withdrawal prior to 59 ½ without paying a penalty or taxes, as long you’ve been actively making contributions for at least five years, in certain circumstances, including:

•   For a first home. You can take out up to $10,000 to pay for buying, building, or rebuilding your first home.

•   Disability. You can withdraw money if you qualify as disabled.

•   Death. Your heirs or estate can withdraw money if you die.

Additionally you can avoid the penalty, although you still have to pay income tax on the earnings, if you withdraw earnings for:

•   Medical expenses. Specifically, those that exceed 7.5% of your adjusted gross income.

•   Medical insurance premiums. During a time in which you’re unemployed.

•   Qualified higher education expenses.

Not only are the early withdrawal restrictions looser than with a traditional IRA, the post-retirement withdrawal restrictions are lesser, as well. Whereas account holders are required to start taking distribution of funds from their IRA after age 73, there is no pressure to take distribution from a Roth IRA at any age.

Roth IRA vs Traditional IRA

There are certain things a Roth IRA and a traditional IRA have in common, and several ways that they differ:

•   It’s an effective retirement savings plan: Though the plans differ in the tax benefits they offer, both are a smart way to save money for retirement.

•   Not an employer-sponsored plan: Individuals can open either type of IRA through a financial institution, and select their own investments or choose an automated portfolio.

•   Maximum yearly contribution: For 2023, the annual limit is $6,500, with an additional $1,000 allowed in catch-up contributions for individuals over age 50. For 2024 it’s $7,000, and $8,000 if you’re 50 and older.

There are also a number of differences between a Roth and a traditional IRA:

•   Roth IRA has income limits, but a traditional IRA does not.

•   Roth IRA contributions are not tax deductible, but contributions you make to a traditional, tax-deferred IRA are tax deductible.

•   Roth IRA has no RMDs. Individuals can withdraw money when they want, without the age limit imposed by a traditional IRA.

•   Roth IRA allows for penalty-free withdrawals before age 59 ½. While there are some restrictions, an account holder can typically withdraw contributions (if not earnings) before retirement.

Is a Roth IRA Right for You?

How do you know whether you should contribute to a Roth IRA or a traditional IRA? The quiz below or this checklist might help you decide.

•   You might want to open a Roth IRA if you don’t have access to an employer-sponsored 401(k) plan, or if you do have a 401(k) plan but you’ve already maxed out your contribution there. You can fund a Roth IRA and an employer-sponsored plan.

•   Because contributions are taxed immediately, rather than in retirement, using a Roth IRA can make sense if you are in a lower tax bracket or if you typically get a refund from the IRS. It may also make sense to open a Roth IRA if you expect your tax bracket to be higher in retirement than it is today.

•   Individuals who are in the beginning of their careers and earning less might consider contributing to a Roth IRA now, since they might not qualify under the income limits later in life.

•   A Roth IRA can be helpful if you think you’ll work past the traditional retirement age.

The Takeaway

A Roth IRA has many of the same benefits of a traditional IRA, with some unique aspects that can be attractive to some people saving for retirement. With a Roth IRA you don’t have to contend with required minimum distributions (RMDs); you can contribute to a Roth IRA at any age; and qualified withdrawals are tax free. With all that, a Roth IRA has a lot going for it.

That said, not everyone is eligible to fund a Roth IRA. You need to have earned income, and your annual household income cannot exceed certain limits. Also, even though you can withdraw your Roth IRA contributions at any time without owing a penalty, the same isn’t true of earnings.

You must have been funding your Roth for at least 5 years, and you must be at least 59 ½, in order to make qualified withdrawals of earnings. Otherwise, you would likely owe taxes on any earnings you withdraw — and possibly a penalty. Still, the primary advantage of a Roth IRA — being able to have an income stream in retirement that’s completely tax free — can outweigh some of the restrictions for certain investors.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Are Roth IRAs insured?

If your Roth IRA is held at an FDIC-insured bank and is invested in bank products like certificates of deposit (CDs) or money market account, those deposits are insured up to $250,000 per depositor, per institution. On the other hand, if your Roth IRA is with a brokerage that’s a member of the Securities Investor Protection Corporation (SIPC), and the brokerage fails, the SIPC provides protection up to $500,000, which includes a $250,000 limit for cash. It’s important to note that neither FDIC or SIPC insurance protects against market losses; they only cover losses due to institutional failures or insolvency.

How much can I put in my Roth IRA monthly?

For tax year 2023, the maximum you can deposit in a Roth or traditional IRA is $6,500, or $7,500 if you’re over 50. How you divide that per month is up to you. You just can’t contribute more than the annual limit.

Who can open a Roth IRA?

Anyone with earned income (i.e. taxable income) can open a Roth IRA, but your income must be within certain limits in order to fund a Roth.

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.

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN1223001

Read more
May
21
2024

How to Write a Check: A Step-by-Step Guide

By | Family Finances, Life & Career, money | Comments Off on How to Write a Check: A Step-by-Step Guide

The basic steps of check-writing sound pretty straightforward: Fill out the date, amount, payee name, and add your signature.

There are, however, right and wrong ways to complete this process. And, despite the current age of online banking, there may still be times when you need to write checks and want to do so correctly. Make an error, and your check may not be cashed, which can lead to hassles and fees.

By learning the simple step-by-step process, you can fill out a check properly when you need to.

Key Points

•   Writing a check involves filling out the date, amount, payee name, and your signature.

•   Errors in check writing can lead to uncashed checks and potential fees.

•   Postdating a check allows it to be deposited at a future date.

•   Writing the dollar amount in words and numbers helps prevent fraud.

•   Signing the check is crucial as an unsigned check is invalid.

1. Date the Check

First things first: Write today’s date on the space provided in the upper right-hand corner of the check. Putting the date on your check will provide evidence of when you wrote the check.

You can also postdate a check and request for the recipient not to deposit the amount until on or after that future date.

filling out date on a check



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

2. Add the Recipient’s Name

In the line, “Pay to the order of,” write the name of the individual or company you are paying. Be sure to double check the spelling of the person’s name and the official vendor name to avoid any payment mishaps.

You can also make a check out to “cash,” but this poses a security risk. If you or the payee loses the check, anyone who finds it will be able to cash it. You can also write a check to yourself if you need to transfer funds from your checking account to another personal account.

adding recipients name to check

3. Write the Payment Amount in Numbers

Write the dollar and cents amount in the rectangular box, located to the right of the payee line. (Example: $156.99.) It’s essential to write the payment amount clearly for the ATM or bank worker.

filling in payment amount on check

4. Write the Payment Amount in Words

To help prevent error or fraud, write the check amount out in words on the line provided.

How to Write a Check with Cents

To write a check with cents, you’ll express the cents amount as a fraction. For example, $156.99 would read as “One hundred and fifty-six and 99/100.”

How to Write a Check with No Cents

If the dollar amount is whole ($156.00), it should read “one hundred and fifty-six and 00/100.” A banker or ATM will check that your numerical amount matches the spelled-out amount.

Recommended: What Is an Outstanding Check?

writing payment amount on check

5. Sign the Check

One of the biggest mistakes check writers make is forgetting to sign the check. Neglecting to do so makes the check invalid and uncashable. Be sure and write your signature on the bottom right-hand line of the check.

adding signature to a check

6. Add a Memo

Adding a note in the memo line on a check is optional, but it’s a good idea. Doing so will help you remember why you wrote the check in the first place: “July 1st rent” or “Beyoncé tix reimbursement.”

Some payees may require additional information which you can put on the memo line on the bottom-left corner. The IRS, for example, will ask you to write your Social Security number on your check.

adding a memo to a check

Example of Writing a Check

Now that you’ve read about writing a check, here’s what a properly filled out one looks like:

example of a filled out check

Tips for Filling Out Checks

The steps on how to write a check are pretty clear. But there are additional tips that can help protect your account and ensure a successful transaction.

Use a Pen

Protect your money. Always fill out a check in ink — preferably blue or black ink for easier readability. Using a pencil is a recipe for theft. You don’t want your payee and dollar amounts being erased and rewritten (aka an altered check).

Don’t Sign a Blank Check

Don’t sign your name on the bottom of the check until it is completely filled out. If a check has your signature, but no payee name or dollar amount, you are leaving yourself wide open for any thief with a pen to fill in the blanks.

Keep Your Signature Consistent

Maintaining a consistent signature can help a bank teller or ATM detect signs of identity fraud. You’ll be better able to prove someone other than you signed your check if you have clear signature samples.

Save a Copy of Your Check

Having a copy of your check can act as proof of payment. You can take a picture of it with your cell phone. Some banks will issue checkbooks with carbon copies—a duplicate check attached to the back of a paper one. If you press down hard enough, your writing will transfer onto the duplicate check.

Recommended: Overdraft vs Non-Sufficient Funds Fees: What’s the Difference?

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


How to Protect Your Accounts When Writing Paper Checks

After mailing or handing over a check, it’s wise to keep tabs on its path and your bank account. Here are some smart moves that can help keep your records straight.

Record the Payment

Most checkbooks come with a check register — a place to record your check usage and current bank balance. It’s important to dot down:

•   The check number

•   The date you wrote the check

•   The payee information

•   The dollar amount

Doing so will help you balance your checkbook and avoid ending up with a negative balance.

Monitor for Fraud or Lost Checks

Having a record of your checks will help you avoid overdraft fees and keep track of any outstanding checks that payees have yet to cash. When you receive your monthly statement, compare it against your check register to catch any suspicious activity.

This can reveal a check that might have been cashed for a different amount than what you filled it out for. This could indicate a kind of fraud called “check washing,” in which a criminal gets a hold of your check, erases information, and fills it out to themselves.

Or you might spot that a check hasn’t been cashed in a timely manner, indicating that it’s a lost check, worth following up on.

Check Your Available Balance

You don’t want to write a check for more money than you currently have, so keep an eye on your bank balance to avoid bouncing a check. Whether you have a traditional or online checking account, you should be able to easily monitor this on your financial institution’s website or app.

Consider Automated Payments

While checks can still have their time and place in your financial life, online and mobile banking can make it easy to pay bills and otherwise send funds to other accounts. This can be accomplished quickly, easily, and securely by automating your finances.

For example, instead of writing paper checks, you could set up recurring transfers to pay bills online every month or make one-off payments as needed. These actions can be done safely and simply, and they eliminate the need for envelopes and postage stamps, too.

Recommended: ACH vs Checks: Key Differences

The Takeaway

It’s possible that check payments could eventually become a thing of the past. Until then, it’s important to know how to write a check and avoid making little errors that could result in big headaches.

Most bank accounts come with checks, but that’s not the only feature to consider when shopping for a new account.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

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

FAQ

What makes a check invalid?

Banks can refuse to cash a check due to a missing signature, insufficient account funds, invalid or illegible account numbers, or if too much time has passed since the check was dated (typically six months).

Can someone steal your identity with a check?

It is possible for criminals to use the information on your check — your name, your address, your routing number — to steal your identity. They might be able to apply for loans in your name or open bank accounts.

Where is the bank routing number on a check?

The bank routing number is at the bottom of the check, to the left. Just to the right of it is your account number, and then at the far right, the check number.

Who signs the back of a check?

The payee endorses the back of the check in order to make a deposit or cash it.

Photo credit: iStock/payphoto

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

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

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

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

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

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

SOBK-Q224-1878350-V1

Read more
May
21
2024
What Is Regulation T (Reg T) & What Does It Do?

Regulation T (Reg T): All You Need to Know

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Regulation T (Reg T): All You Need to Know

Regulation T, or “Reg T” for short, is a Federal Reserve Board regulation governing the extension of credit from brokerage firms to investors (also called margin accounts). In margin trading, Regulation T is used to determine initial margin requirements. An investor who fails to meet the initial margin requirements may be subject to a Reg T call, which is one type of margin call.

Understanding Regulation T and Regulation T calls is important when trading securities on margin.

What Is Regulation T?

Regulation T is issued by the Federal Reserve Board, pursuant to the 1934 Securities Exchange Act. The purpose of Reg T is to regulate how brokerage firms and broker dealers extend credit to investors in margin trading transactions. Specifically, Regulation T governs initial margin requirements, as well as payment rules that apply to certain types of securities transactions.

Margin trading means an investor borrows money from a brokerage to make investments. This allows the investor to potentially increase their investment without putting up any additional money out of pocket. For example, an investor may be able to put up $10,000 to purchase 100 shares of stock and borrow another $10,000 on margin from their brokerage to double their investment to $20,000.

Regulation T is central to understanding the inner workings of margin accounts. When someone is buying on margin, the assets in their brokerage account serve as collateral for a line of credit from the broker.

The borrowed amount is repaid with interest. Interest rates charged on margin accounts vary according to the brokerage and the amount borrowed. Trading on margin offers an opportunity to amplify returns, but poses the risk of steeper losses as well.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 11%* and start margin trading.

*For full margin details, see terms.

💡 Quick Tip: When you trade using margin, you’re using leverage — i.e. borrowed funds that increase your purchasing power. Remember that whatever you borrow you must repay, with interest.

How Reg T Works

Regulation T works by establishing certain requirements for trading on margin. Specifically, there are three thresholds investors are required to observe when margin buying, one of which is directly determined by Regulation T.

Here’s a closer look at the various requirements to trade on margin:

•   Minimum margin. Minimum margin represents the amount an investor must deposit with their brokerage before opening a margin account. Under FINRA rules, this amount must be $2,000 or 100% of the purchase price of the margin securities, whichever is less. Keep in mind that this is FINRA’s rule, and that some brokerages may require a higher minimum margin.

•   Initial margin. Initial margin represents the amount an investor is allowed to borrow. Regulation T sets the maximum at 50% of the purchase price of margin securities. Again, though, brokerage firms may require investors to make a larger initial margin deposit.

•   Maintenance margin. Maintenance margin represents the minimum amount of margin equity that must be held in the account at all times. If you don’t know what margin equity is, it’s the value of the securities held in your margin account less the amount you owe to the brokerage firm. FINRA sets the minimum maintenance margin at 25% of the total market value of margin securities though brokerages can establish higher limits.

Regulation T’s main function is to limit the amount of credit a brokerage can extend. It’s also used to regulate prohibited activity in cash accounts, which are separate from margin accounts. For example, an investor cannot use a cash account to buy a stock then sell it before the trade settles under Reg T rules. It may be beneficial to review the basics of leveraged trading to deepen your understanding, too.

Why Regulation T Exists

Margin trading can be risky and Regulation T is intended to limit an investor’s potential for losses. If an investor were able to borrow an unlimited amount of credit from their brokerage account to trade, they could potentially realize much larger losses over time if their investments fail to pay off.

Regulation T also ensures that investors have some skin in the game, so to speak, by requiring them to use some of their own money to invest. This can be seen as an indirect means of risk management, since an investor who’s using at least some of their own money to trade on margin may be more likely to calculate risk/reward potential and avoid reckless decision-making.

Example of Reg T

Regulation T establishes a 50% baseline for the amount an investor is required to deposit with a brokerage before trading on margin. So, for example, say you want to open a margin account. You make the minimum margin deposit of $2,000, as required by FINRA. You want to purchase 100 shares of stock valued at $100 each, which result in a total purchase price of $10,000.

Under Regulation T, the most you’d be able to borrow from your brokerage to complete the trade is $5,000. You’d have to deposit another $5,000 of your own money into your brokerage account to meet the initial margin requirement. Or, if your brokerage sets the bar higher at 60% initial margin, you’d need to put up $6,000 in order to borrow the remaining $4,000.

Why You Might Receive a Regulation T Call

Understanding the initial margin requirements is important for avoiding a Regulation T margin call. In general, a margin call happens when you fail to meet your brokerage’s requirements for trading in a margin account. Reg T calls occur when you fall short of the initial margin requirements. This can happen, for instance, if you’re trading options on margin or if you have an ACH deposit transaction that’s later reversed.

Regulation T margin calls are problematic because you can’t make any additional trades in your account until you deposit money to meet the 50% initial margin requirement. If you don’t have cash on hand to deposit, then the brokerage can sell off securities in your account until the initial margin requirement is met.

Brokerages don’t always have to ask your permission to do this. They may not have to notify you first that they intend to sell your securities either. So that’s why it’s important to fully understand the Reg T requirements to ensure that your account is always in good standing with regard to initial margin limits.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

The Takeaway

Regulation T is used to determine initial margin requirements — i.e. the amount of cash an investor must keep available relative to the amount they’ve borrowed. Margin trading may be profitable for investors, though it’s important to understand the risks involved. Specifically, investors need to know what could trigger a Regulation T margin call, and what that might mean for their portfolios.

An investor who fails to meet the initial margin requirements may be subject to a Reg T call, which is problematic because they are restricted from making additional trades until they deposit the 50% initial margin requirement. If the investor doesn’t have cash on hand to deposit, then the brokerage can sell off securities in the account until the initial margin requirement is met.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Photo credit: iStock/loveguli

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
*Borrow at 11%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q224-1885772-V1

Read more
May
21
2024
What Is the MOASS and When Will It Happen?

What Is the MOASS?

By | Growing Wealth, invest, Investing | Comments Off on What Is the MOASS?

“MOASS,” or, the “Mother of All Short Squeezes,” was largely unknown to investors prior to 2021. But a saga involving so-called “meme stocks,” most notably GameStop stock, changed that, and MOASS entered the investing lexicon. In short, that specific scenario, bringing the Mother of All Short Squeezes, as a strategy, to investors’ attention, involved a rag-tag band of day traders taking on the hedge fund giants, with a short-sale “squeeze” that greatly impacted some of those giants.

Meme stocks, including GameStop and AMC Theatres, saw further short squeeze action in mid-May 2024, too. But the episode in 2021 shined a light on investors, short-sales, trading squeeze strategies, and digital trading on a massive scale, all of which fell under the MOASS umbrella.

Key Points

•   MOASS stands for “Mother of All Short Squeezes,” a phenomenon where stock prices skyrocket due to mass buying.

•   It gained prominence with the GameStop stock saga, where day traders challenged large hedge funds.

•   The strategy involves a high volume of purchases to drive up stock prices, countering short sellers.

•   Effective execution of MOASS can lead to significant profits for traders who initiate the squeeze.

•   The approach carries high risks, especially for those who join late or cannot sell off at peak prices.

Short Squeeze Basics

A short squeeze is an orchestrated effort to drive up shares of a stock that’s being heavily shorted. MOASS, meaning the Mother of All Short Squeezes, as noted, is a trading strategy in which a high volume of buyers drive up shares of stocks that were being “shorted” by other investors.

A short squeeze trading strategy needs two components to work — a short seller or, more preferably, several short sellers on one side and a group of disciplined contrarian investors who unroll a short squeeze and buy shares of the stock being shorted.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

How the MOASS Works

In order to understand how a short squeeze — or a massive short squeeze — works, you first need to understand short selling.

Short sellers aim to profit from the fall in a stock’s price. They do so by borrowing and selling shares of a stock that they believe will decline in value. Then, when the stock price falls, a short seller buys the stock at the reduced price, returns the shares, and pockets the profit.

If the short seller makes the right call, meaning the price does fall, they earn the difference between the price when they entered the short position and the lower stock price at which they bought to cover.

If the short seller makes the wrong call, and the price goes up, the investor must buy the stock at a price higher than when they entered the short position, thereby losing money — and negating any potential for a profit.

As short sellers wind up leaving their short positions when they execute a buy order on the stock, those “short-squeeze” buy positions get noticed by other day traders, who also jump in to purchase the stock. That, in turn, drives the stock’s price even higher, since there are fewer shares of the stocks available to purchase.

Short-sellers, highly alarmed by the rising share price, also issue buy orders on the stock to exit the short sale strategy and reduce their investment risk, which completes the cycle and puts the short squeeze in full effect. This can result in the short sales losing money and the MOASS day traders making a profit on the rising stock price.

Recommended: Understanding Low Float Stocks

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

*Probability of Member receiving $1,000 is a probability of 0.028%.

GameStop: The Prime Example of MOASS

Perhaps the best example of MOASS in action is the GameStop saga in early 2021. At the time, several hedge fund firms had “shorted” GameStop stock, which essentially meant betting the share price of the stock would decline. That didn’t happen with GameStop shares. Some context is important to understand, too, as many retail stocks, like GameStop, had been heavily affected by the pandemic at the time.

But GameStop shares bucked the trend.

A group of day traders hanging out on a Reddit investing forum called “Wallstreetbets” banded together and started buying up shares of GameStop stock. The gambit worked, with GameStop shares skyrocketing from $19 per share to around $350 per share. The retail investors had successfully “squeezed” the short sellers, causing several hedge funds to lose hundreds of millions of dollars on their short positions on GameStop.

If the short squeeze works, the share price will continue to rise and the short investors, many of whom have fixed deadlines built into their short sales positions, will have to sell their shares and cut their losses, thereby driving the stock price even higher. That rewards the short squeeze investor, who profits from the rising share price, especially as other buyers enter the fray and drive the share price up even higher.

Once victory was declared with the GameStop short squeeze, the Reddit traders turned their attention to other so-called meme stocks where short selling activity was particularly high. That group included AMC Entertainment Holdings, Koss Corporation, and Blackberry, which all saw share volumes rise after the MOASS traders entered the fray.

Thus, a series of short squeezes that target more and more short sellers is really what MOASS is all about: squeezing enough short-sellers to achieve critical mass in the trading markets, and making huge profits in the process.

Also, as mentioned, a similar situation played out in May 2024, when certain stocks (including GameStop and AMC Theatres) were at the center of another short squeeze, though smaller in scale than the 2021 events.

Recommended: Pros and Cons of Momentum Trading

MOASS Trading Tips

Investors who want to participate in the next short squeeze effort should be careful. So-called “meme” stock trading can be fraught with risk, especially if you’re left holding the bag after other short-squeezers sell out of their positions before you do.

Take these risk considerations with you before participating in a mass short squeeze play.

Consider Minimal Purchases to Limit Losses

While the adrenaline level can be high when participating in a short squeeze trading event, tamp down emotions by limiting the amount of money you invest in a GameStop-type situation. As the old gambling adage says, never risk money you can’t afford to lose. That goes double when chasing the thrill of a MOASS scenario.

Should You Expect to Lose Money?

There’s a significant chance that you’ll lose money at some point with a short squeeze play.

Nothing is guaranteed in the stock market and that’s especially the case as short-sellers have learned their lesson after meme-stock related events in recent years, and grow more cautious about their investing habits. MOASS trading patterns can be something of a roller coaster ride for investors, and the odds that your ride will dip along the way are high. That can translate into days or even weeks of your short-squeeze buying strategy where your investment returns are written in red ink.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

MOASS Tip: Have a Plan to Sell Quickly

Short squeeze investing isn’t exactly an orderly process and you need to put your interest first ahead of other MOASS investors. Why? Because volatility can be high and prices can swing at a moment’s notice when trading MOASS-themed stocks. Additionally, nobody really has any idea how high a price can go with a short squeeze in play, and nobody really knows if a stock will rise higher at all.

That’s why it’s a good idea to have a fixed “sell price” in mind when engaging in a short squeeze situation — a stop loss order to automatically sell the stock at a specific price can be a good idea in this scenario.

If you buy a targeted MOASS stock at $50 and it goes to $70, there’s no way of knowing if the stock will go any higher — it might and it might not. Worse, the price could slide back to $30 when buyers lose interest in the stock.

Having a good investment exit strategy in a short squeeze scenario, can help minimize investment losses and capitalize on a stock increase when and if it happens.

The Takeaway

“MOASS” means the “Mother of All Short Squeezes,” and perhaps the best example of it in action involved so-called “meme stocks” in 2021. Short squeeze trading strategies can bring a great deal of portfolio-shaking volatility to the investment table, and there are plenty of heavily shorted stocks that could be the next MOASS, but it’s impossible to know which one could trigger a squeeze.

That means MOASS may not be the best strategy for long-term investors or those with an aversion to risk. A short squeeze takes a significant amount of discipline, patience, and attention on the part of the investors, with continual risk in play until the squeeze is played out.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Photo credit: iStock/PeopleImages

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q224-1885888-V1

Read more

CATEGORIES

  • All
  • No categories
Close modal

See what SoFi can do for you and your finances.

Select a product below and get your rate in just minutes.

Student Loan
Refinancing

Personal
Loans

Online
Investments

Other

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

©2025 Social Finance, LLC All rights reserved.
TLS 1.2 Encrypted
Equal Housing Lender