Jun
30
2024
What Is a Depository Institution?

Guide to Depository Institutions

By | Budgeting & Goals, Financial Independence, money, SMB | Comments Off on Guide to Depository Institutions

A depository institution is a financial institution into which consumers can deposit funds and where they will be safely held. Banks and credit unions are typical examples of these institutions.

Learning about how these institutions work and their pros and cons can build your financial literacy.

What Is a Depository Institution?

A depository institution is a place or entity — such as a bank — that allows consumers and businesses to deposit money, securities, and/or other types of assets. There, the deposit is kept safely and may earn interest.

To share a bit more detail, depository institutions are financial institutions that:

•   Engage in banking activities

•   Are recognized as a bank by either the bank supervisory or monetary authorities of the country it is incorporated in

•   Receive substantial deposits as a part of their regular course of business

•   Can accept demand deposits

In the U.S., all federally insured offices of the following are considered to be depository institutions:

•   Commercial banks

•   Mutual and stock savings banks

•   Savings or building and loan associations

•   Cooperative banks

•   Credit unions

•   International banking facilities of domestic depository institutions


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How Do Depository Institutions Work?

A depository can receive funds from consumers and businesses via such means as:

•   Cash

•   Direct deposit

•   Teller or ATM deposits

•   Checks

•   Electronic transfers

The depository institution holds these funds, and they are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, per ownership category, per insured financial institution. If the institution is a credit union, funds will be similarly protected by the National Credit Union Administration, or NCUA vs. FDIC.

Funds are accessible on demand (aka demand deposits rather than time deposits), and the depository institution is required to keep a certain amount of cash in its vault to ensure it has funds available for clients.

Customers are able to earn interest on different types of deposits. The depository institution also earns interest; it’s one of the ways financial institutions make money. It does so by lending money on deposit to their customers in the form of different types of loans. (For instance, some of the money on deposit might earn the account holder 2% interest, while the bank then uses the funds for a mortgage that charges 6.00% interest. There’s a good profit margin there for the depository institution.)

Recommended: What Is a Community Development Financial Institution?

Types of Depository Institutions

To better understand the purpose depository institutions serve, let’s look at some examples.

Credit Unions

Credit unions may offer many of the same services as banks, but they are owned by account holders, who are also sometimes called members. These institutions are not nonprofits. The profits that the credit union earns are paid to members in the form of dividends or are reinvested into the credit union. To put it another way, the depositors are partial owners of the credit union. You often need to live in a certain area or work at a certain profession to keep your money at a credit union.

Commercial Banks

Commercial banks are what many of us visualize when we hear the term “bank,” whether we are thinking of a major bank with hundreds of brick-and-mortar branches or an online-only entity. They are usually owned by private investors and are for-profit organizations.

Commercial banks tend to offer the most diverse services of all depository institutions, from personal banking to global banking services such as foreign exchange-related services, money management, and investment banking. The offerings may depend on how large the institution is and which customer segments it serves (say, consumers and different types of businesses).

Savings Institutions

Savings institutions are the banks that serve local communities and loan institutions. Local residents deposit their money in these institutions, and in return, they can access credit cards, consumer loans, mortgages, and small business loans.

It’s possible to set up a savings institution as a corporation or as a financial cooperative. The latter makes it possible for depositors to have an ownership share in the saving institution.

Recommended: What Is an Intermediary Bank?

Depository Institutions vs Repositories

Repositories and depositories are two different things despite the fact that their names sound almost the same. Here’s some of the key differences.

•   Depositories hold cash and other assets, but repositories hold abstract things such as intellectual knowledge, files, and data.

•   Depositories are usually credit unions, banks, and savings institutions, while repositories are typically libraries, data-storage facilities, and information-based websites.

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Depository Institutions vs Non-Depositories

Unlike depository institutions, non-depository institutions don’t accept demand deposits. These are some of the differences between these two types of institutions:

•   Depository institutions accept deposits and store them for safekeeping. Non-depository institutions, on the other hand, provide financial services but can’t accept demand deposits for safekeeping.

•   Depository institutions are FDIC- or NCUA-insured, while non-depository institutions can be SEC-insured or have another type of insurance.

•   Credit unions and banks are commonly depository institutions. Non-depository institutions are often brokerage firms and insurance companies.

Pros of Depository Institutions

Depository institutions have a few benefits to note:

•   Money is safe and FDIC- or NCUA-insured

•   Accounts can earn interest on time deposits such as certificates of deposit (CDs) and possibly other deposits

•   Helps keep the economy healthy by allowing depository institution to lend out deposits and earn interest

•   Reduced risk of assets being lost or stolen

Cons of Depository Institutions

There are a few downsides to depository institutions. Consider these points:

•   Limited growth potential of deposited funds compared to investments, money market accounts, and CDs

•   Banks, credit unions, and savings institutions may charge fees for holding funds

•   Minimum account balance may be required

Tips for Choosing a Depository Institution

When it comes time to choose a depository institution, it can help to keep the following things in mind when comparing different options.

•   Type. Carefully consider if a credit union, saving institution, or commercial bank is the right fit. Some commercial banks have brick-and-mortar locations, while others offer all of their services online. Online banks usually pay higher interest rates on savings and charge fewer and/or lower fees, since they don’t have the overhead associated with operating branch locations. Credit unions also tend to offer higher interest rates and lower fees as they are not-for-profit as commercial banks are.

•   Features. Look for a depository institution that offers perks and services that suit your needs. Special features may include high interest rates, early access to direct-deposit paychecks, cash back deals, fee-free ATMs, and free access to credit scores.

•   Fees. Shop around to see which depository institution has the lowest and/or fewest fees, such as account maintenance fees and overdraft fees. As noted above, credit unions tend to charge lower and/or fewer fees than commercial banks, as do online banks.

•   Convenience. If you like to bank locally and know your bank tellers and officers, choosing an institution that has branches in your neighborhood is a wise move. If you prefer the seamlessness of banking 24/7 by app, however, you might opt to open an online savings account.

Recommended: What Is an Online Savings Account?

The Takeaway

Commercial banks, credit unions, and savings institutions are all examples of depository institutions. Depository institutions can be places to safely store funds that can then easily be accessed. Funds will typically be insured by either the FDIC or NCUA up to their usual limits of $250,000 per depositor, per ownership category, per insured institution.

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FAQ

What is the difference between a bank and a depository?

There is no difference between a bank and a depository. A bank is a type of depository institution. Credit unions and saving institutions can also be depositories.

What are the types of depository institutions?

There are three main types of depository institutions. Commercial banks, credit unions, and savings institutions are all types of depository institutions.

Are commercial banks depositories?

Yes, commercial banks are one kind of depository institution where consumers can securely stash their money.

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SoFi members with direct deposit activity can earn 4.20% 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 4.20% 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 4.20% 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 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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

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

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Jun
28
2024
Guide to Market-Linked Certificates of Deposit (CDs)

Guide to Market-Linked Certificates of Deposit (CDs)

By | Growing Wealth, Investing, money | Comments Off on Guide to Market-Linked Certificates of Deposit (CDs)

A market-linked certificate of deposit (CD) tracks a basket of underlying securities, or an index like the S&P 500. They differ from traditional CDs, which generally pay a fixed rate of interest. These accounts are sometimes called equity-linked CDs or stock CDs.

A market-linked CD (MLCD) is similar to a traditional certificate of deposit, in that it’s a time-deposit account with a fixed term during which the investor’s funds are unavailable. The principal (though not the gains) is federally insured up to $250,000. But market-linked CDs come with some risks — including the possibility of zero gains at maturity.

What Is a Market-Linked CD?

As noted, a market-linked CD tracks an underlying index or collection of securities, rather than paying a fixed rate of interest. Investing in CDs offers some familiar advantages, chiefly that the CD investor can deposit their funds for the specified term (typically a few months to a few years), and count on a steady rate of return until the CD reaches maturity.

The CD’s total return is unlikely to be high, especially when comparing deposit accounts, because it’s based on current interest rates, but there is little to no market risk. Traditional CDs are federally insured, whether by a bank or a credit union, for up to $250,000. For this reason, traditional CDs are considered a fairly low-return, low-risk investment.

Market-linked CDs share some of these features — e.g. the investor deposits funds for a set period of time, and the funds are unavailable until the CD matures. But the returns of an MLCD are, as the name suggests, linked to the stock market, which adds in a layer of potential reward, but also potential risk.

Unlike traditional CDs, which are considered cash equivalents, market-linked CDs are more like securities. The reason for creating market-linked CDs goes back to the days when banks couldn’t sell securities, and these products offered investors a workaround.

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How Do Market-Linked CDs Work?

Unlike traditional CDs, market-linked CDs do not offer fixed interest payments. Rather the return is based on the underlying investments or market index the CD tracks. Some of these market benchmarks include equity, commodity indexes, or a basket of commodities or currencies. But investors don’t see precisely the same gains and losses as the market.

Typically, the upside of MLCDs is capped in one of two ways. For example, the return on a market-linked CD will be determined by its participation rate, i.e. the percentage of the upside you will see. For example, an 80% participation rate means you only receive 80% of the gains from the underlying market. An interest cap refers to an MLCD where there is simply an upper limit for any gains.

Fortunately, the principal amount deposited in the CD is protected. At maturity, investors will get their full deposit back. But if the market underperforms, the CD may not have any gains. In other words, at maturity there is no guarantee your return will be more than your deposit amount.

Recommended: How Do CD Loans Work?

How to Calculate the Return of a Market-Linked CD

To calculate the return of a market-linked CD, financial institutions average out the close price of the underlying index over a certain period of time. For this method, you can take the average of the index’s different values in two different periods.

Another method you can use is the point-to-point method, which involves identifying two values. The first is the value of the index when the market-linked CD was issued, and the other is the value of the index before the CD’s maturity date, which is referred to as the ending point. The difference between these two values will yield the expected return on your market-linked CD.

The final return also assumes that the funds are left in the CD until maturity. Withdrawing funds earlier than the maturity date — whether that’s two months or 20 years — will likely trigger early withdrawal penalties.

Pros of Market-Linked CDs

Market-linked CDs have several favorable characteristics that may be appealing for investors who are looking for alternatives to conventional CDs, or directly investing in the stock market without having too much risk exposure.

•   Protection: Market-linked CDs protect your principal and when held to maturity, the principal is backed by the bank that issues it. In the scenario where the underlying market declines during the period where you hold the CD, investors are protected from losses.

•   Insurance: Market-linked CDs are also FDIC- or NCUA-insured for up to $250,000 on the principal investment, not investment earnings.

•   Potential for greater returns: Market-linked CDs have the ability to provide investors with higher returns than traditional CDs. Because the underlying is based on a collection of stocks, commodities, or indexes, there is a chance market-linked CDs can outperform traditional CDs.

•   Return on original deposit: At time of maturity, you will get the full amount of your original deposit regardless of the performance of the underlying market index or securities. If you choose to sell your market-linked CD prior to maturity on the secondary market, there is no guarantee that you will get the full amount of your principal back.

Cons of Market-Linked CDs

Investors must also consider the risks associated with holding market-linked CDs.

•   Liquidity risk: Investors must be aware that when opening a market-linked CD, they are locking up their money for a period of time, and they must be willing to hold on to the CD through its maturity to achieve the full benefits, even though they are not obligated to do so. If you need access to the capital in the CD and want to withdraw money, you may incur withdrawal fees.

•   Market risk: Market-linked CDs that are linked to the equity markets are subject to volatility, which can impact the market-linked CD returns. Other factors can influence market-linked CDs such as changes in interest rates.

•   Taxes: MLCD earnings are taxed as interest income, not as capital gains, and thus investors will pay a higher rate for their earnings. Also, interest must be reported annually, even though it’s not paid until maturity.

•   Little or no profit: The worst scenario is holding a market-linked CD to maturity — but not making a profit. Even though your original principal will be protected, there is no guarantee that you will make more than your deposit amount.

   You may have the possibility of greater gains if you invest your money in an exchange-traded fund (ETF) or index fund directly, which provides similar diversification benefits. However, you are still exposed to market risk, and your original principal is at risk.

How to Open a Market-Linked CD

Opening a market-linked CD is fairly straightforward. Here are some broad steps.

•   At the financial institution of your choosing, you can open a market-linked certificate of deposit by choosing the interest rate and maturity date.

•   Next, deposit the amount of money you are able to lock up for a period of time.

•   Some market-linked CDs have a minimum investment requirement and a maximum deposit limit per account which must be considered.



💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Alternatives to a Market-Linked CD

Alternatives to market-linked CDs could include investing in a bond fund. Similar to a CD, bond funds have different maturity dates, either short term or long term, and can offer competitive yields. Depending on the creditworthiness of the bonds, the yield can vary. Bonds with a high credit rating which are lower risk may have a lower yield than bonds with a lower credit rating, but the latter may come with higher risk. The choice of bond fund depends on the investor’s risk tolerance.

Investors may also consider a high-yield savings account, which is lower risk but yields less than a market-linked CD. These types of accounts are more for emergency funds but if you are looking for the lower risk options to store your cash, high yield savings accounts can be another alternative to a market-linked CD.

When to Consider Investing in Market-Linked CDs

Investors may be interested in a market-linked CD if they are looking for an alternative for a traditional CD and for the potential for higher returns. Market-linked CDs may also offer some diversification, and protection of principal investment.

If you are looking for exposure to the broader stock market with managed risk, a marked-linked CD may be a suitable option because it’s viewed as an alternative to directly investing in the stock market. That said, market-linked CDs are insured products and are not considered securities.

The Takeaway

Market-linked CDs are, as the name implies, a sort of hybrid savings/investment option. They offer some of the features of traditional CDs: You invest your money for a fixed period of time; if you withdraw funds before the maturity date you face an early withdrawal penalty; and your funds are federally insured for up to $250,000. Because MLCDs are market-linked, though, a CD’s performance is tied to underlying securities or a market index.

Thus, investors don’t receive a fixed interest rate, and returns can fluctuate. Typically these CDs are also capped in terms of the gains they can provide. And while an investor’s initial principal deposit is protected from a market drop, you can still lose money if you withdraw funds early or try to sell this type of CD on the secondary market. Finally, like any other investment in the markets, there’s no guarantee that a market-linked CD will see a profit by the time it matures.

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FAQ

What is a market-linked CD?

Market-linked CDs are certificates of deposits that can be linked to stocks, commodities, an index — or a mix of these — depending on the type of return the investor is seeking, and their risk tolerance.

Is a market-linked CD a security?

No. A market-linked CD is federally insured in the event of bank failure or fraud, so your principal is protected up to $250,000. Insured products are not considered securities.

What is a stock market CD?

A stock market CD is another name for a market-linked CD, and is linked to a broad stock market index like the S&P 500. This means the CD’s performance will adjust as the index changes.

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Jun
26
2024
What Would Happen if I Deposited $10,000 Into My Bank Account?

What Would Happen if I Deposited $10,000 Into My Bank Account?

By | Budgeting & Goals, Financial Independence, money | Comments Off on What Would Happen if I Deposited $10,000 Into My Bank Account?

A cash deposit of more than $10,000 into your bank account requires special handling. Your bank must report the deposit to the federal government. That’s because the IRS requires banks and businesses to file Form 8300 and a Currency Transaction Report, if they receive cash payments over $10,000. Depositing more than $10,000 will not result in immediate questioning from authorities, however. The report is done simply to help prevent fraud and money laundering. You have nothing to lose sleep over so long as you are not doing anything illegal.

Key Points

•   Banks are required to report when customers deposit more than $10,000 in cash at once.

•   A Currency Transaction Report must be filled out and sent to the IRS and FinCEN.

•   The Bank Secrecy Act of 1970 and the Patriot Act of 2001 dictate that banks keep records of deposits over $10,000 to help prevent financial crime.

•   Structuring a deposit is when an individual splits up several deposits so that a single deposit of more than $10,000 cash does not happen.

•   Penalties for not filing Form 8300 or filing a fraudulent form include fines and possible prison sentences.

Are Financial Institutions Required to Report Large Deposits?

Banks and credit unions are required to report when a customer deposits cash over $10k. Maximum deposit limits vary by bank, but in this case, anything above $10,000 (even a penny more) is the amount to know.
The Bank Secrecy Act and the Patriot Act dictate that financial institutions create a paper trail of financial activity that could be suspicious. The reasoning is that law enforcement authorities can better control money laundering activities and tax evasion by having a record of these larger deposits. Other malicious activities like terrorism, drug trading, and broad financial crimes might be prevented.

Do You Have to Report Large Deposits?

You might have to report large deposits to your bank account if you own a business. (Performing a small direct deposit typically does not need to be reported.) The IRS rules also apply to financial activities performed by a business or individual involved in the business. You must complete IRS Form 8300 to report any transaction or even a series of related transactions that total $10,000.

About that “series of related transactions” part: Transactions are considered related when they take place within 24 hours of each other or if the person or business simply suspects they are related.

What Is IRS Form 8300?

IRS Form 8300 is used to help regulators prevent financial crime. The form is separate from other banking guidelines like funds availability rules. It is sent to the IRS and the Financial Crimes Enforcement Network (FinCEN). The form is used to report cash payments over $10,000 received in a trade or business.

On IRS Form 8300 , you must identify the individual from whom the cash was received and the person on whose behalf the transaction was conducted. In addition, you need to include a description of the transaction and method of payment. Additional disclosure of information may spell out the business that received the cash and whether multiple parties were involved.

What Happens When Deposits Are Reported?

A paper trail of potentially suspicious deposits is created after Form 8300 is transmitted to the IRS. Depositing cash at an ATM or with a bank teller, so long as it is below the $10K threshold, will usually not be reported. Law enforcement agencies can use the paper trail for future investigations if conditions warrant it.

To understand this in a bit more detail, know that first, when a cash deposit of more than $10,000 is reported, you are identified through your Social Security number (SSN) and other personal information.

What Is the Bank Secrecy Act?

The Bank Secrecy Act of 1970, mentioned above, may sound somewhat intimidating. What it actually does is require that banks keep records of each customer who deposits more than $10,000 in cash at one time in a single account. The paper trail is sent to various law enforcement groups to track where the money moves to. The Bank Secrecy Act includes civil and criminal penalties for entities not complying with the requirements.

Moreover, the 2001 Patriot Act made the Bank Secrecy Act broader; it can now better detect activity related to terrorism. Again, this is nothing to be concerned about as long as you aren’t engaged in any illegal activities like bank fraud.

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Reporting the Deposit

There are several steps involved in reporting a cash deposit over $10,000, whether the deposit is made to a standard or premium checking account or a savings account. There is likely nothing to be concerned about if you are just going about your daily business and not involved in illegal activity.

Banks Must Verify ID and Other Important Information

The Currency Transaction Report is used to verify a depositor’s information. The SSN, name, and address are provided to the FinCEN.

Banks Will Review All Cash Transactions

Financial institutions go through all their channels when a suspicious deposit over $10,000 is made. A series of several smaller amounts that add up to a deposit of more than $10,000 is also treated as a large deposit. Cash put into an account at a teller window or through an ATM can be linked and considered a structured deposit (more on that below). These are much more serious potential events than everyday banking activities, such as making a small cash deposit or ATM withdrawal.

Banks Will Determine If You Are Structuring Deposits

Structuring a deposit is when an individual splits up several deposits so that a single deposit of more than $10,000 cash does not happen. Someone might do this to avoid the bank having to file a Currency Transaction Report to FinCEN and resulting in a paper trail. This suspicious activity raises red flags as it suggests someone is intentionally trying to fly under the regulators’ radar. If a bank determines someone is structuring, then that activity might face additional scrutiny.

All Information Will Go Into a Currency Transaction Report

The personal information and deposit details mentioned earlier go into a Currency Transaction Report within 15 days of the transaction being considered. Reports are kept on file at the bank for five years, too. Once again, however, most people need not be too concerned with this, provided your banking is legal. Rather, it may be better to focus on account basics, like savings account withdrawal fees, not the ramifications of pernicious illegal activity, as long as they are following all the laws.

Penalties for Non-Compliance

You may wonder what happens if an individual tries to skirt the protocols described above. Here are details:

•   Civil penalties for not filing Form 8300 include fines of $250 per return. If this is considered to be intentional disregard, the fine can be the greater of $25,000 or the amount of cash received in the transaction up to $100,000.

•   Criminal penalties for not filing Form 8300 or filing a fraudulent form include a monetary fine of up to $100,000 for individuals and $500,000 for businesses. Prison sentences of up to five years are also a possible penalty for non-compliance.

Are There Any Exemptions to Consider?

A bank can file for an exemption if one of its business customers routinely deposits over $10k. It’s important to know that some businesses cannot get an exemption. For example, law firms, pawn dealers, accounting firms, and trade unions are some corporation types for which the IRS will not grant an exemption.

The Takeaway

You don’t have anything to worry about if you deposit more than $10,000 in cash to your checking account or your savings account, assuming you are doing nothing wrong. A large deposit is simply reported by a bank to regulators to track possible suspicious activity. Businesses must also file IRS Form 8300 within a specific time frame after a $10,000 cash payment.

Structuring deposits (breaking up funds into smaller amounts for deposit, so as to avoid filing a form 8300) is another no-no. Since there are significant penalties for attempting to skirt the law, it’s wise to not attempt such moves.

No matter how much you are (lawfully) depositing, it’s wise to make sure you have the bank account best suited to your needs and financial situation. For instance, you could look for an online high-yield savings account and/or an account that has no or low account fees. Explore the options to see what may be right.

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 4.20% APY on SoFi Checking and Savings.

FAQ

How much money can I deposit in the bank without being reported?

A deposit over $10,000 is the amount to consider; amounts under that threshold may not have to be reported. There’s a catch, though: If a customer makes several small cash payments or deposits within a 12-month window, filing Form 8300 might have to be done should the payments or deposits exceed $10,000. These are known as “structured” deposits and can raise red flags if not reported.

How often can you deposit $10,000?

You can deposit more than $10,000 whenever you’d like, but just be aware that the receiving financial institution is required to report those funds to the IRS. If you are a business owner and depositing over $10k in cash is a frequent practice, the bank can file an exemption after the first large deposit to avoid filling out future reports to the IRS.

How do you explain a large deposit?

Depositing over $10k only results in an IRS form being filed by the bank. You often won’t have to do anything to explain it unless you are suspected of fraud or money laundering. The money is deposited like any other amount would be.

Photo credit: iStock/TARIK KIZILKAYA

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.

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.

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.

4.20% APY
SoFi members with direct deposit activity can earn 4.20% 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 4.20% 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 4.20% 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 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

This article is not intended to be legal advice. Please consult an attorney for advice.

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

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

SOBK-Q224-1926391-V1

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Jun
23
2024
Guide to Commercial Banking

Guide to Commercial Banking

By | Budgeting & Goals, Financial Independence, money | Comments Off on Guide to Commercial Banking

Commercial banks provide financial services for small and large businesses, including checking and savings accounts, loans, lines of credit, letters of credit, underwriting, and payment processing. These services enable businesses to operate in domestic and international markets. What’s more, financing from commercial banks may help businesses grow, which could potentially help drive the domestic economy.

What Is Commercial Banking: A Definition

Commercial banking involves financial institutions that are dedicated to serving businesses. This differs from retail banking, which provides personal banking services to individuals, such as checking and savings accounts.

Typically, a commercial bank offers businesses everything from deposit accounts, loans, and lines of credit to merchant services, payment processing, international trade services, and more. In these ways, a commercial bank can be a vital partner in helping a business succeed and grow.

While commercial banks offer a suite of services for medium and large businesses, small and new business owners can also take advantage of their offerings. Sometimes, people starting an enterprise use their personal accounts for banking. However, it is typically better to seek out commercial banking and open separate accounts for business vs. personal finances. This simplifies record keeping and the payment of taxes, and it also helps keep these two realms separate in case of any legal action.

How Commercial Banking Works

Commercial banks serve small- to large-sized businesses. You may be familiar with their names, as many of them also have retail banking divisions. Three examples of commercial banks in the United States are JPMorgan Chase & Co., Bank of America Corp., and Wells Fargo & Co. All are regulated by the United States Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).

One very important function of commercial banks: providing financing to businesses. Before a commercial bank extends a loan to a business, it assesses the creditworthiness of the borrower by looking at its assets, profitability, and size.

In addition, commercial banks provide an array of services, supporting businesses with transfers from one account to another, lines of credit, lockbox services, payment processing, and foreign exchange services. Here is a closer look at what a commercial bank may offer:

Deposit Accounts

Commercial bank deposit accounts function like retail bank checking and savings accounts. They enable businesses to pay suppliers and employees by holding cash and, in some cases, account holders may earn interest on the balance.

There are three main types of deposit accounts: demand, fixed, and savings.

•   Account holders can use demand deposits or current account deposits for business transactions. They typically do not earn interest and are subject to service charges.

•   The bank holds fixed deposits for a specific term. Deposits likely earn interest, and the account holder can make withdrawals.

•   Savings deposits function as both fixed deposit and current accounts. Depositors can withdraw cash from these accounts, but the amount may be limited. Savings accounts earn interest but probably less than a fixed deposit.

Loans

Businesses need capital to thrive. Whether hiring staff, renting office or manufacturing space, or buying materials and supplies, operating a business and growing it takes cash. Commercial banks extend business loans vs. personal loans and charge interest on the loans. That’s one of the key income streams for banks. The bank likely turns a profit on lending, and the business gets the funds it needs to launch its enterprise or to expand or buy real estate or new equipment.

Lines of Credit

Commercial banks usually provide businesses with lines of credit. A line of credit is short-term funding that can help a company manage its obligations while it waits for cash flow to improve. For example, a company may have to wait for receivables’ payment in order to meet this month’s payroll. A line of credit can help bridge that gap.

Letters of Credit

A business may need to request a letter of credit from a commercial bank to show creditworthiness and to secure goods or services from an overseas trading partner. A letter of credit can serve as a guarantee from the issuing bank of payment for the goods once the letter’s requirements are met. The requirements might include the shipping date and the address the goods should be shipped to. In this way, a commercial bank can smooth international trade and help its clients’ business grow.

Lockbox Services

Lockboxes facilitate faster payments for businesses. Bank customers can send payments to a post office box near the bank, and the bank deposits the payments or funds to the customer’s account. This helps expedite the receipt of deposits and subsequent payments from the client to its providers. It can be a helpful cash flow tool for commercial enterprises.

Payment and Transaction Processing

Commercial banks typically facilitate the payments that businesses receive from their customers through electronic checks, paper checks, and credit card payments. Commercial banks may also provide services such as chargeback management fraud protection. All of these services can help keep a business humming along.

Foreign Exchange

Cross-border payments are complex because of exchange rates and the fact that each country has a different legal system. Commercial banks can provide foreign exchange services so that a company can do business overseas with a minimum of time and effort. This can streamline operations for a business enterprise so they can focus their attention on other activities.

The Significance of Commercial Banks

Commercial banks play a vital role in the financial life of the U.S. They help support the country’s economy by providing capital and services to businesses. By providing loans, they likely allow businesses to increase production and potentially expand, which may, in turn, boost the economy, lower unemployment, and encourage consumer spending. In addition, commercial banks support cross-border trade and transactions (say, by issuing revolving letters of credit) so that businesses can operate in international markets.

Commercial Banking vs Investment Banking

When considering the definition of commercial banking, it can be helpful to compare and contrast it to other kinds of banking. For instance, investment banking is a subset of banking that is focused on creating capital for companies, governments, and other organizations.

While some financial institutions may combine commercial and investment banking, because of the Gramm-Leach-Bliley Act of 1999, the two kinds of banking serve different markets. Here’s more detail of what investment banks do:

•   Underwriting

•   Overseeing mergers and acquisitions and initial public offerings (IPOs)

•   Facilitating reorganizations

•   Aiding in the sale of securities

•   Brokering trades for institutions and private investors

Commercial Banks vs Retail Banks

Another important distinction is how commercial banks differ from retail ones. Some banks will offer both sets of services, but here’s what retail banks typically offer in terms of personal banking services:

•   Savings accounts and checking accounts (you can often open these bank accounts online)

•   Mortgages

•   Personal loans

•   Debit cards

•   Certificates of deposit (CDs)

There are also alternatives to traditional banking that can assist with personal finance transactions.

Examples of Commercial Banks

It can be helpful to have specific examples of commercial banks to better understand what they do and how they work. There are three types of commercial banks: public sector banks, private banks, and foreign banks.

•   A public sector bank is one where the government owns a major share. Public banks provide funding for projects that benefit the local public and community, which could include infrastructure projects or affordable housing. The Bank of North Dakota (BND) is the only active public bank in the United States.

•   Most of the banks in the United States are private banks run by individuals or limited partners. Examples are JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo.

•   A foreign bank is any bank headquartered in another country but doing business in the United States. Two examples are Barclays Bank PLC, headquartered in the United Kingdom, and the Royal Bank of Canada (RBC).

Benefits of a Commercial Bank Account

There are several reasons for a business to consider opening a commercial bank account.

•   Clients are likely to feel more confident making payments for services rendered to a business rather than an individual. Simply put, it’s more professional and may be perceived as more trustworthy.

•   Having separate bank accounts for business and personal transactions can simplify accounting and taxes (business expenses are more easily deducted).

•   If a business owner faces legal or financial challenges with their business activity, their personal liability could be limited and protected.

•   A business can apply for business loans from a commercial bank and finance expansion or costly equipment purchases with favorable lending terms.

•   Business accounts are FDIC-insured in the event the bank fails.

Is My Bank a Commercial Bank?

If your bank provides services to businesses, such as checking accounts, financing, lines of credit, and international trade services, it is likely a commercial bank. A retail bank, on the other hand, will provide services to individuals (joint vs. separate accounts, debit cards, personal loans, and more) and could be a department within a commercial bank.

The Takeaway

Commercial banking differs from retail banking in terms of the clientele it serves. Retail banks provide checking and savings accounts, loans, and other services to individuals to manage their day-to-day finances. Commercial banks help businesses launch, operate, and potentially grow with services like deposit accounts, loans, lines of credit, payment services, and more.

If you are hunting for personal banking services, explore what different retail banks have to offer, such as direct deposit, low or no account fees, and mobile banking, to find the best option for your financial needs.

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 4.20% APY on SoFi Checking and Savings.

FAQ

What is the difference between commercial banking and retail banking?

Retail and commercial banking serve different clients. Retail banking provides checking and savings accounts, financing, lines of credit, credit cards, and other services to individuals. Commercial banking usually provides checking and savings accounts, financing, underwriting, letters of credit, lines of credit, and other functions to businesses.

Is my money safe in a commercial bank?

Your money is essentially as safe in a commercial bank as it can be. It is generally protected from loss due to bank failure by federal insurance up to $250,000.

What role does a commercial bank play in the economy?

Commercial banks may support the economy by providing capital and services to organizations. These, in turn, could stimulate the economy by doing business, growing, and employing more workers. Commercial banks may also facilitate cross-border payments so that businesses can move into international markets.

Photo credit: iStock/Passakorn Prothien

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.

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.

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.

4.20% APY
SoFi members with direct deposit activity can earn 4.20% 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 4.20% 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 4.20% 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 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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Jun
20
2024
All You Need to Know About IRA Certificates of Deposit (CDs)

All You Need to Know About IRA Certificates of Deposit (CDs)

By | Budgeting & Goals, Growing Wealth, Investing, money, Preparing for Retirement | Comments Off on All You Need to Know About IRA Certificates of Deposit (CDs)

An IRA CD is simply an individual retirement account (IRA) in which the investor has opened one or more certificates of deposit (CDs).

This may provide tax advantages and be a smart long-term move for some savers. Keep reading to learn how an IRA CD works and its pros and cons.

What Is an IRA CD?

An IRA CD is an IRA where your money is invested in certificates of deposit. In other words, an IRA CD is a traditional, Roth, or other type of IRA account where the funds are invested at least partly in CDs.

Investing in CDs can offer some tax advantages and may be a good option for long-term savings. As you may know, a CD, or certificate of deposit, is a time deposit. You agree to keep your funds on deposit for a certain amount of time, typically at a fixed interest rate.

💡 Quick Tip: Don’t think too hard about your money. Automate your budgeting, saving, and spending with SoFi’s seamless and secure mobile banking app.

How Do IRA CDs Work?

If you choose to put your retirement money in an IRA, you have the chance to choose investments that might include stocks, mutual funds, bonds — and also CDs. By investing in CDs within an IRA, you can add to your portfolio’s diversification. Unlike equities, CDs can offer a predictable rate of return.

By investing in an IRA CD, you no longer have to pay taxes on the interest gains, and the money can grow taxed-deferred.

But if you withdraw funds prior to the CD’s maturity date, you will face an early withdrawal penalty. Once the IRA CD matures, you can either renew it or take your money and invest it in the stock market for potentially higher returns.

How much can you contribute to an IRA CD? It depends on the type of IRA account you choose. Traditional and Roth IRAs have contribution limits of $7,000 per year as of 2024, or if you are 50 or older, the contribution limit is $8,000 per year. The contribution limits for SEP IRAs are typically higher.

If you choose an IRA CD with a bank or credit union backed by the Federal Deposit Insurance Corp., or FDIC, your money in the IRA CD is insured for up to $250,000 per depositor, per account ownership category, per insured institution. This means that if the bank goes under for any reason, your retirement funds are covered up to that amount.

CD Basics

A CD or a certificate of deposit is a type of savings or deposit account that usually offers a fixed interest rate for locking up your money for a certain period of time, known as the term. An investor deposits funds for the specified terms (usually a few months to a few years), and cannot add to the account or withdraw funds from the account until the CD matures.

In exchange, for keeping your money in a CD, the bank will offer a higher interest rate compared with a traditional savings account. But the chief appeal for retirement-focused investors is that CDs can provide a steady rate of return, versus other securities in a portfolio which may entail more risk.

You may be able to find variable-rate and promotional-rate CDs as well.

Recommended: How Investment Risk Factors into a Portfolio

IRA Basics

An IRA or individual retirement account is a tax-advantaged account designed for retirement planning. There are different IRA types to choose from, such as a traditional IRA, Roth IRA, or SEP IRA. By contributing to this type of account, you can have your money grow tax-free or tax-deferred, depending on the type of IRA you open.

Think of an IRA as a box in which you place your retirement investments. With an IRA, investors have the flexibility to invest in a variety of securities for their portfolio.

For this reason, it might make sense for some investors to include CDs as part of their asset allocation within the IRA.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.20% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


Pros and Cons of IRA CDs

IRA CDs have unique characteristics that can benefit account holders as they think about how to handle their retirement funds. The upsides include:

•   Compared to investing in the stock market where investment returns can be volatile and unpredictable, IRA CDs are low-risk cash investments.

•   CDs guarantee a fixed return.

•   With an IRA CD, there are similar tax benefits that come with a traditional IRA. Investors can enjoy tax benefits such as growing your account with pretax dollars while having your earnings accumulate tax-deferred until you reach retirement.

There are some cons associated with IRA CDs to keep in mind:

•   With an IRA CD, you have to keep your money locked away for a period of time that varies depending on the maturity date you choose. During this time, you cannot access your funds in the event you need capital.

•   If you decide to withdraw cash prior to the IRA CD’s maturity, you will incur early withdrawal penalties. After age 59 ½ there is no penalty for withdrawing cash.

•   While putting your retirement funds in an IRA CD is a safer and lower-risk option than investing in the stock market, the returns can be quite low. If you are in retirement and are concerned about the stock market’s volatility, an IRA CD could be a safer option than other securities. But if you are many years away from retirement, an IRA CD may not yield enough returns to outpace inflation over time.

Pros of IRA CDs

 Cons of IRA CDs
Low-risk investment Money is locked away until maturity
Guaranteed return Penalty for early withdrawal
Tax-deferred growth Returns can be low vs. other retirement savings options

Who Should and Should Not Invest in an IRA CD?

IRA CDs are a safe way to invest money for retirement. However, they are best suited for pre-retirees who are looking for low-risk investments as they approach retirement age.

If you are many years away from retirement, an IRA CD is probably not the best option for you because they are low-risk and low-return retirement saving vehicles. In order to see growth on your investments you may need to take on some risk.

If you decide an IRA CD is the right option for you, you also must determine if you are comfortable with keeping your money stowed away for a period of time. Account holders can choose the length of maturity that best suits them.

How to Open an IRA CD

The first step is to open an IRA at a bank, brokerage, or other financial institution. Decide if a traditional, SEP, or Roth IRA is right for you. You can set up the IRA in-person or online. Once you open an IRA account, you can buy the CD.

Choose the CD that fits your minimum account requirements and length of maturity preference. Typically, the shorter the CD maturity, the lower the minimum to open the account. When considering maturity, you also should compare rates. Often, the longer the maturity, the higher the rate of return.

The Takeaway

If you’re looking to add diversification to the cash or fixed-income part of your portfolio, you might want to consider opening an IRA CD — which simply means funding a CD account within a traditional, Roth, or SEP IRA. Bear in mind that CDs typically offer very low interest rates, though, and your money might see more growth if you chose other securities, such as bonds or bond funds.

If you’re thinking about how to earn a steady rate of return on your savings, consider an account with SoFi.

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 4.20% APY on SoFi Checking and Savings.

FAQ

What is the difference between an IRA CD and a regular CD?

A standard CD is a separate account you open at a bank or credit union. An IRA CD is where the CD is funded within the IRA itself.

Can you withdraw from an IRA CD?

With a regular CD, you withdraw the funds penalty-free when the CD matures. With an IRA CD, however, you can withdraw the funds penalty free starting at age 59½, per the rules and restrictions of the IRA.

What happens when an IRA CD matures?

Once your IRA CD matures, you’ll receive the principal plus interest. Then you can either leave the IRA CD as is or renew it. You cannot withdraw the funds from an IRA CD until age 59 ½, as noted above.

Are IRA CDs safe?

Yes, IRA CDs are considered low-risk. If you open an IRA CD with a federally insured institution, your funds can be covered up to $250,000 per depositor, per account ownership category, per insured institution.

Who offers IRA CDs?

IRA CDs can typically be found at traditional and online-only banks as well as credit unions and brokerage firms.

Photo credit: iStock/LeszekCzerwonka

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 4.20% 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 4.20% 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 4.20% 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 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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

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.

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

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

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