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Income is money earned, plain and simple, right? While that statement is true, it doesn’t tell the full story. If you look a little more closely, you’ll learn that there are two kinds of income. Active income is money you make by actively participating in work, whether you are salaried or hourly, employed or own your own business, earn commissions or tips, and so on.

Passive income, on the other hand, is typically money that you earn without active participation. Examples might be money generated by a rental property you own or a YouTube account you started but haven’t updated.

It’s important to know the difference between the two for multiple reasons, including the fact that the IRS treats active and passive income differently. Both are taxable, but in distinct ways, so it’s important to correctly classify each.

To understand active income vs. passive income, read on. You’ll learn:

•   What is active income?

•   What is passive income?

•   Examples of passive vs. active income.

•   Why it’s important to know the difference between active and passive income.

What Is Active Income?

Active income requires you to take action to make money. Working a 9-to-5 job, earning tips as a cosmetologist, and driving for a rideshare app are examples of this principle in action. All require active participation to earn money and are thus considered active income.

Most people (i.e., those who don’t inherit money or come into a large sum of money without effort) will need to earn active income to pay bills and build their savings. Active income is often dependable in quantity and schedule (e.g., a regular paycheck for a salaried position).

With enough active income, you may be able to invest in something that generates passive income down the road (you’ll learn more about that kind of money in a moment).

Recommended: What Is Residual Income?

Examples of Active Income

Earning active income is something that so many of us do — from doctors to mail carriers, from plumbers to programmers. Even people who own their own business, work side gigs, or rely mostly on tips earn active income.

Here are the main sources of active income:

•   Salaries

•   Hourly wages

•   Income from invoices as an independent contractor

•   Sales commissions

•   Tips

•   Bonuses

💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.

What Is Passive Income?

Passive income can be more difficult to define because the IRS has a long list of qualifiers that can be a bit challenging for the average person to understand. At a high level, the IRS guidelines for passive activities are as follows identifies two kinds of passive activities:

•   Trade or business activities in which you don’t materially participate during the year

•   Rental activities, even if you do materially participate in them, unless you’re a real estate professional.

The key phrase to consider in the IRS’s definition of passive income is “materially participate.” The IRS has a list of seven tests (“material participation tests”) to apply to your income to determine if you actively participated in generating it.

These tests measure things like hours of activity (500+ hours in a year automatically makes it active income) and level of involvement.

You only have to satisfy one of the seven tests for your income to be considered active — which has tax implications. That’s why it’s wise to work with an accountant to properly define your income.

Examples of Passive Income

Because the IRS has strict rules regarding the classification of passive income, things get complicated. An activity could be classified as active for one person but passive for another. It comes down to how you participate.

With that caveat in mind, there are some top ways to make passive income:

•   Renting a space: Whether you are renting out an entire property, renting a room in your home, or even renting a garage or parking spot, the income can be classified as passive.

•   Affiliate marketing and ads: If you have a high-traffic website that does not require regular content creation to drive traffic, you can earn passive income through affiliate marketing (adding specific links to products or services) and through display ads.

•   Licensing intellectual property: If you’ve written a book, designed an online course, taken high-quality photos, or even engineered an app, you might be able to earn royalties whenever someone purchases your creation.

•   Cash back from a credit or debit card: If you are using a cash back credit card for everyday purchases, that “free money” can serve as passive income. But remember, with cash back, you’ve got to spend money to make money. Nice to know: The IRS views cash back on rewards cards as a coupon or rebate, which means you don’t need to worry about tax implications.

💡 For additional ideas, check out our Passive Income Ideas for 2023 Guide.

Some personal finance blogs might tell you that interest, dividends, and earnings from investments are passive income. After all, you just put your money in an account, and the money (usually) grows on its own; you don’t have to expend any effort. However, the IRS classifies this as “portfolio income,” and it has its own separate tax implications.

Active vs Passive Income: What’s the Difference?

So what is the difference between passive and active income? Generally speaking, you have to actively and continually work to keep active income flowing into your bank account. Passive income often requires labor and financial investment upfront, but once everything is in place, passive income should flow to you without the need for much, if any, effort.

A strong example of active vs. passive income is flipping a house vs. renting out a house. Consider the difference:

•   If you regularly buy houses, renovate, and sell at a profit, you are making active income. If you stop buying and selling houses, the income stops.

•   If you buy a property and rent it out to tenants, you have a passive income stream flowing in each month — with occasional expenses like property taxes and maintenance.

Broadly speaking, passive income might refer to interest and dividends, royalties, money made from digital content creation, rental properties, and more. But as far as the IRS is concerned, passive income has a much narrower definition. It’s a good idea to work with a certified accountant to understand how your income should be classified and taxed.

Next, take a closer look at the differences between the two types of income.

Potential Yearly Income Made

Active income is generally more dependable, especially if it’s from a salaried or hourly job with a set number of weekly hours. Thus, it’s easier to predict your yearly income.

Certain types of passive income, like rental income, might be more predictable than others, but you still might encounter unexpected expenses like maintenance and repairs or sudden vacancies. Other types of passive income, like money from display ads or affiliate marketing, depend on the number of people who visit your website and actively click links.

How These Are Taxed

Taxes on active income are generally straightforward. If you’ve paid taxes before on hourly or salaried wages, you’ve already paid taxes on active income. It’s a good idea to brush up on federal tax brackets before tax season.

Taxes on passive income are more complicated and can vary by situation. Income from real estate you lease out, for example, has its own rental property IRS regulations . If you earn passive income, working with a certified account can be a smart move to ensure you get your taxes right each April.

How These Incomes Affect Lifestyle

Active income requires that you regularly work to generate money. For the average American, that looks like a 40-hour work week, though some people may work part-time while others may typically put in more time on average.

Because passive income requires minimal (or no) participation, you might be able to lead a more flexible life. This assumes you have enough passive income flowing in each month to pay your bills and maintain a monthly budget. If that’s the case, you might be able to travel more freely, focus on volunteer work, or spend time doing your favorite hobbies. Or passive income might supplement your full-time active work, allowing you to save more for retirement or meet other financial goals.

The Takeaway

Most Americans who work earn active income; that is, making money requires their active participation on an ongoing basis. Passive income, on the other hand, requires little to no involvement, meaning you might make money without lifting a finger, though often an initial investment of time and cash is required. The IRS has important qualifications for active, passive, and portfolio income (from investments); understanding the differences and how they are taxed is important when you file.

Looking to grow your active or passive income? Open a SoFi bank account with direct deposit to take advantage of a competitive APY on every cent you put in the account. Our Checkings and Savings account also lets you conveniently spend and save in one place, and it has automatic savings features and no monthly fees. Plus, eligible accounts can 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 4.60% APY on SoFi Checking and Savings.

FAQ

What are the pros and cons of active and passive income?

A major benefit of active income is that it is usually dependable; however, you have to regularly and consistently work to earn that money. A benefit of passive income is that, after potentially investing time and money upfront, it requires little to no ongoing work. The cash may simply come your way. Worth noting: The tax implications of passive income can be complex and require professional guidance.

Do all people need to have passive income?

You do not need passive income to pay your bills; for many people, active income from their job will suffice. If you would like to infuse more flexibility into your life and earn additional income, it could be a smart move to generate passive income streams.

Can you live solely off of passive income?

It is possible to live solely off of passive income if you establish enough steady passive income streams to cover your expenses. Many passive income streams require work upfront and/or an initial investment, but once they’re going, they might be easy to maintain.

Is active income better than passive income?

Both active and passive income have pros and cons. Active income requires ongoing work but can mean a steady paycheck. Passive income may need an initial investment of time and money but can then keep cash flowing your way. Generally speaking, any type of income is good because it enables you to pay your bills, pay down debt, build your savings, and even invest.

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Photo credit: iStock/Adrian Vidal

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. ©2023 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 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government 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, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% 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 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 4.60% 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 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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.

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.

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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Quality of life is surprisingly tough to describe, but most of us know we want to make the most of ours. Broadly speaking, the “quality of life” definition is a subjective perception of one’s overall well-being that includes both positive and negative aspects of our lives. When we say we want a better quality of life, most of us know what that means: We are seeking a “good life,” with positive finances, a comfortable lifestyle, happy professional and personal lives, and not too much stress.

In other words, quality of life includes many realms — our work, our money, our personal connections. All of these elements (and more) are things we can boost if we want to improve our quality of life.

Read on to learn:

•  What is quality of life?

•  What factors influence quality of life?

•  What are financial and other ways of improving quality of life?

What Is ‘Quality of Life’?

What does quality of life mean? It is a subjective measure of one’s overall well-being. It typically includes several components. For example, quality of life includes personal finances, physical and mental health, and relationships. All of these components can positively or negatively influence one’s perceived quality of life.

This means that focusing on one of these aspects at the expense of others could reduce your quality of life overall. For example, suppose you accept a job promotion that brings a hefty salary increase, which you imagine will boost your quality of life. You begin to daydream about a new car and luxe vacations. While higher pay can improve your finances and quality of life, it can also have some hidden downsides. What if you wind up working more, sleeping less, and spending less time with loved ones? You might find your stress levels increase and your quality of life therefore decline. .

In this way, it’s obvious that finding the right balance between personal, professional, and financial factors is important to achieving a good quality of life.

What Factors Define Quality of Life?

As noted earlier, quality of life is not a singular measure but instead captures many aspects of your life. Factors that define quality of life can include:

•  Physical health

•  Sleep habits

•  Mental health

•  Physical safety

•  Job satisfaction

•  Work-life balance

•  Leisure time

•  Financial resources

•  Caring, adequate healthcare

•  Personal and professional relationships

•  Transportation and ease of mobility

•  A comfortable home

As you can see, quality of life captures almost every aspect of our lives.

How Can Finances Affect Your Quality of Life?

Finances can have a major impact on your quality of life. This is simply because money can improve many (but not all) aspects of quality of life.

For example, if you don’t have a lot of money, you might be forced to live in a small, cramped house with your family of five and have a long commute to work. In this case, finances are negatively affecting your quality of life. Perhaps you can’t afford healthy food, a gym membership, or vacations. In that way, finances might also reduce your physical and mental wellness, which are important factors in your quality of life.

But perhaps you get a raise and can afford to move into a bigger house that is closer to your job. Your finances are now positively affecting your quality of life. You can afford to eat better and pay for a yoga class, too. There can be many examples of how money can affect and improve nearly every aspect of our lives.

Financial Ways of Improving Quality of Life

There are many ways to improve your quality of life through financial means. This includes having job security, setting savings goals, and more. Here’s a closer look:

Having Job Security

Having job security can enhance your quality of life. Perhaps the most obvious way is that it makes your income stable. You know exactly how much you will make every month and can budget accordingly.

But job security can improve your quality of life in other ways. Consider a job that isn’t secure, where you could experience a loss of income at any moment. That could hurt your mental health by potentially sending your anxiety and stress soaring.

If you don’t have job security, you might want to consider seeking a new job, training for a different career, or starting a side hustle to bring in more money. These are ways to create stability and improve your financial health.

Knowing Your ‘Why’ Financially

Knowing your “why” financially means you understand where you find fulfillment in terms of money and your overall life direction. You have identified what your financial goals are, and you recognize the most valuable benefits of the money you earn. In this way, you have clear goals that you can pursue. This kind of clarity can represent a form of financial self-care.

For example, perhaps you value and deeply care about education. This might lead you to open a 529 plan to help you save money so your child can attend college. Or maybe you want to make the world a better place, so you work hard so you can donate to a favorite charity.

Until you know your “why,” it is difficult to know how to direct your efforts and how to achieve your financial goals. Once you figure out your motives and goals, you are likely on a better path to improving your quality of life. Invest the time and introspection in figuring this out.

Setting Savings Goals

Setting and achieving your savings goals is a great way to improve your quality of life financially. There are many savings goals you may want to set — an emergency fund, a down payment on a home, retirement, etc.

Some goals will be short-term financial goals, others will be farther into the future. Not only does hitting your goals allow you to achieve dreams like having a destination wedding or buying a house, it can also build your sense of confidence and personal agency. You can see your progress and reach your aspirations.

It’s important to set specific, achievable goals rather than generally having a desire to save money. Getting specific allows you to take specific steps to achieve your goals while also holding you accountable for them. By specifying dollar amounts and automating savings on payday you can make improving your financial quality of life that much easier.

Increasing Your Financial Knowledge

Increasing your financial knowledge means learning about money and how it works. Achieving financial literacy can deepen your knowledge about all things finance, such as budgeting, saving, and investing. The more you learn, the more you will be able to tweak and optimize your finances to help your money go further.

There are many ways to improve your financial literacy, which can include reading articles, subscribing to newsletters and podcasts, and taking online courses. You can also likely find a wealth of articles on your bank’s website or app as well as many apps that help you manage your money and learn smart tactics.

Investing Your Money

Historically, the stock market is a great way to build your personal wealth and quality of life. But people are sometimes hesitant to start investing because they don’t think they have enough cash or enough knowledge. That’s a common money misconception: You don’t need much money to start investing, and it’s a great way to build wealth.

If you keep your money in a savings account, for example, it likely won’t keep pace with inflation. Even high-yield savings accounts don’t usually earn as much interest as the rate of inflation. If you want your money to grow over time, whatever your goal might be, investing is one of the best ways to achieve that. You might work with a financial professional to get started or, to save money in fees, try a robo advisor, an algorithm that can help you economically pick stocks that fit with your financial goals.

Non-financial Ways of Improving Quality of Life

Money plays a big role in improving your quality of life, but in some cases, your quality of life depends on things money can’t buy. Keep reading to understand some of the most important aspects to consider.

Having Time to Yourself

So many of us lead always plugged-in lives with very little downtime. While it may not be fodder for an amazing social-media post, having time to yourself can have many benefits. It can help you unwind and can ease stress. Many people engage in meditation, which can reduce negative emotions and increase self-awareness.

If meditation doesn’t interest you, there are still plenty of ways to benefit from time to yourself. You could go hiking on a nature trail, exercise, or even just stream some movies or TV at home. There’s no shortage of things you can do alone and still have a good time. You may find your life feels more relaxed and rewarding when you build in some pockets of “you” time.

Recommended: 15 Creative Ways to Save Money

Having Meaningful Relationships

Humans are social creatures, and that means we need other humans. This dates all back to our primate ancestors, who often lived in groups for the sake of survival.

While most of us today aren’t worried about being hunted by lions, tigers, or bears, we still depend on one another. Healthy relationships are associated with several benefits, such as less stress, healthier behavior, and even living longer.

In terms of improving quality of life, you may want to put some effort into prioritizing your personal relationships. Perhaps you and your college roomie schedule a Zoom call for the first Friday of every month, or you meet your work mentor regularly for coffee. Or you and your partner might agree to have an unplugged, no-texting-allowed evening every now and then or pursue a new hobby together to strengthen your bond.

Exercising and Staying Healthy

Your physical health is a key part of your quality of life, and it doesn’t have to be expensive to maintain. You can easily spend money on gym memberships or a personal trainer. However, there are ways to be healthy without spending much.

You can go running, walking, biking, or do a home workout (you can find all sorts of classes, from kickboxing to Pilates, online).

Eating well is another part of good health. Check out the produce at local farmers’ markets; search online for Meatless Monday recipes to help cut back on high-fat forms of protein. You might partner with a friend on these pursuits to have extra support.

Recommended: Are You Bad With Money? Here’s How to Get Better

Getting Good Sleep

Another ingredient in the quest for a better quality of life: getting a good night’s sleep. Sleep needs vary from person to person, but most adults need seven or more hours of sleep per night. It’s also important to maintain a consistent sleep schedule.

There are many benefits of quality sleep, and they all improve your quality of life. These include getting sick less often, reducing stress, and lowering your risk of health problems, such as diabetes and heart disease.

If you want to improve your sleep hygiene, as it’s called, look into ways to improve your bedtime habits. Try turning your phone off so you aren’t tempted to reply to texts or check the latest news. Keep your bedroom cool; between 60 and 67 degrees Fahrenheit is considered optimal, according to the Cleveland Clinic. Waking up well refreshed can help contribute to a better quality of life.

The Takeaway

Quality of life is a subjective measure of our overall well-being. Typically, both financial and non-financial factors contribute. For instance, if you have a well-paying job that is also super stressful, your quality of life might not be great despite having plenty of spending money. To optimize your quality of life, it’s wise to consider both your money habits and your financial goals, as well as such aspects as mental and physical health, career stability, and the quality of your personal relationships.

One way to improve your quality of life is to have the right banking partner. When you open a SoFi online bank account with direct deposit, you’ll earn a competitive APY and pay no account fees, which can help your money grow faster. Plus, you’ll have access to a suite of tools that can make budgeting and saving that much simpler.

It’s easy to bank better with SoFi.

FAQ

Do you need to be rich to have a high quality of life?

There are many factors that affect quality of life. Having a lot of money can help you have a high quality of life but it certainly doesn’t guarantee it. People with a lot of money may wind up with more stress. It’s possible to achieve a high quality of life without a hefty bank balance.

Why is quality of life important?

Quality of life is important because it touches every aspect of our lives. It involves our physical and mental health, finances, job satisfaction, free time, and much more. Having a high quality of life means having an overall satisfaction across all of these realms.

How can we achieve quality of life?

There is no one way to achieve a high quality of life; it very much depends on personal circumstances, both financially and in other realms. To optimize yours, you might start with improving your finances, sleeping and exercising more, or deepening your personal relationships. In general, you can start by identifying the areas of your life that you feel are most lacking.

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Photo credit: iStock/AsiaVision
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. ©2023 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 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government 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, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% 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 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 4.60% 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 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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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It’s pretty easy to rollover your old 401(k) retirement savings to an IRA, a new 401(k), or another option — yet millions of workers either forget to rollover their hard-won retirement savings, or they lose track of the accounts.

According to a 2021 study by Capitalize, some 24 million 401(k) accounts seem to be forgotten or “lost”, with an average balance of about $55,000 in these dormant accounts.

Given that a 401(k) rollover just takes a couple of hours and, these days, minimal paperwork, it makes sense to know the basics so you can rescue your 401(k), roll it over to a new account, and add to your future financial security.

How Does Rolling Over Your 401(k) Work?

Many people wonder how to rollover a 401(k) when they leave their jobs. First, you need to know the difference between a transfer and a rollover.

A transfer is when you move funds between two identical types of retirement accounts. For example, if a person moves money from an old 401(k) to a new 401(k), a traditional IRA to another traditional IRA, or from an old Roth IRA to a new Roth IRA — that’s a transfer. It’s the most direct way to move funds from one tax-advantaged account to another.

A rollover is when you move money between two different types of retirement accounts. For example: You might rollover a 401(k) to an IRA.

💡 Recommended: What Is an IRA and How Does It Work?

Bear in mind, rollover accounts can be different, but must have the same tax treatment. You can’t rollover a tax-deferred traditional 401(k) to a Roth IRA without doing some kind of Roth conversion.

Steps to Roll Over Your 401(k)

Here are the basic steps, with more detail to follow:

1.    Decide whether you want to roll it over to an IRA (a common option); transfer the funds to another employer’s 401(k); or set up an account like a self-directed IRA.

2.    Set up the rollover account. Remember that rollovers have to be apples to apples in terms of tax treatment: a tax-deferred 401(k) to a traditional IRA; a Roth 401(k) to a Roth IRA.

3.    Contact your former employer or 401(k) plan sponsor to initiate the rollover. (Depending on which rollover option you choose, the process or paperwork may be slightly different.)

4.    Generally, the funds are sent to you in a check although they can be wired to a rollover IRA at a new institution, for example. Either way, you have 60 days to deposit the funds in another tax-deferred account, or you will owe taxes on the money and possibly a penalty.

Benefits of Rolling Over Your 401(k)

Once you understand how to roll over a 401(k), it’s easy to understand what the advantages are. First and foremost, by doing a rollover, you ensure that you are in charge of your retirement funds (which is important, after years of investing in your 401(k)).

Other pros include:

•   Your investment account costs will likely be lower once you do a rollover, because leaving your savings in your old 401(k) when you’re no longer an employee means you may pay higher account management fees. Fees matter, and can substantially reduce your savings over time.

•   You may have more investment choices. Typically, when you do a rollover from a 401(k) to an IRA at a new institution, your investment options increase which might improve portfolio returns and could further reduce fees.

•   If you don’t want a self-directed portfolio, where you choose the investments in your rollover, you may be able to choose a robo-advisor or automated portfolio so there’s less for you to manage.

•   If you have more than one 401(k) from various jobs, you can consolidate them as part of the rollover process.

Disadvantages of Rolling Over a 401(k)

Since you want to avoid retirement mistakes, it’s also important to consider some of the reasons why a rollover may not be the best idea.

•   First, if you have a lot of appreciated company stock, you may be able to pay a lower tax rate on the gains if you transfer the stock to a brokerage account.

•   While a rollover account at a different institution may provide more investment options, if you keep your 401(k) where it is, you may be able to buy investments at the cheaper institutional rate.

•   If you do a rollover, you may lose some of the federal legal protections that come with 401(k) plans. For example, the money in your 401(k) is typically protected from creditors or collections, whereas the money in an IRA is shielded by state laws, which can vary.

•   In some cases, your employer may allow you to withdraw funds from your 401(k) without paying the usual 10% penalty, if you are 55 or older when you leave your job.

Pros and Cons of Doing a 401(k) Rollover

Pros	Cons
Potentially lower investment fees, which can impact savings over time.	If you have company stock in your 401(k), it might save on taxes if you transfer the stock to a brokerage rather than doing a rollover.
More investment choices; more control over your portfolio.	Investment options may cost less in a 401(k) vs. an IRA.
The option to switch to a robo advisor if you prefer an automated approach.	Keeping your 401(k) may offer legal protection from creditors or collections.
Ability to consolidate accounts.	Keeping your money in your 401(k) could give you penalty-free access before age 59 ½ vs. an IRA.

When Is a Good Time to Roll Over a 401(k)?

Once you know how to roll over a 401(k), and you’ve decided that’s your next step, doing it as soon as you leave your job is likely the best time. But you can generally do a rollover any time. It’s your money. If you decide to do the rollover five years after leaving your job, that’s a better time than never.

That said, if you have a low balance in your 401(k) account — for example, less than $5,000 — your employer might require you to do a rollover. And if you have a balance lower than $1,000, your employer may have the right to cash it out. Be sure to check the exact terms with your employer.

In most instances, you have 60 days from the date you receive an IRA or 401(k) distribution to then roll it over into a new qualified plan. If you wait longer than 60 days to deposit the money, it will trigger tax consequences, and possibly a penalty. One rollover per year is allowed under the rules.

5 Things You Can Do With Your Old 401(k)

If you’re still asking yourself, But how do I rollover my 401(k)?, here are five possible choices that might make sense when deciding how to handle your old account.

Option 1: Leave Your 401(k) Where It Is

Is it ever a good idea to let sleeping 401(k)s lie? Sometimes, yes.

For instance, maybe your old job was with a super-hip, savvy startup that chose a stellar plan with multiple investment options and low administration fees that stayed in place even after you left your job. This is rare! But the point is: If you’re happy with your portfolio mix and you have a substantial amount of cash stashed in there already, it might behoove you to leave your 401(k) where it is.

Other than that, you probably want to make sure you’re in charge of your money — not your former employer.

Also, besides any additional fees you might end up paying, racking up multiple 401(k)s as you change jobs could lead to a more complicated withdrawal schedule at retirement.

Option 2: Roll Over Your 401(k) Into an IRA

If your new job doesn’t offer a 401(k) or other company-sponsored account like a 403(b), don’t worry: You still have options that’ll keep you from bearing a heavy tax burden. Namely, you can roll your 401(k) into an IRA, or Individual Retirement Account.

The entire procedure essentially boils down to three steps:

1.    Open a new IRA that will accept rollover funds.

2.    Contact the company that currently holds your 401(k) funds and fill out their transfer forms using the account information of your newly opened IRA. You should receive essential information about your benefits when you leave your current position. If you’ve lost track of that information, you can contact the plan sponsor or the company HR department.

3.    Once your money is transferred, you can reinvest the money as you see fit. Or you can hire an advisor to help you set up your new portfolio. It also may be possible to resume making deposits/contributions to your rollover IRA.

Option 3: Roll Over Your 401(k) to Your New Job

If your new job offers a 401(k) or similar plan, rolling your old 401(k) funds into your shiny, new 401(k) account may be both the simplest and best option — and the one least likely to lead to a tax headache.

That said, how you go about the rollover has a pretty major impact on how much effort and paperwork is involved, which is why it’s important to understand the difference between direct and indirect transfers.

How to Roll Over Your 401(k): Direct vs Indirect Transfers

Here are the two main options you’ll have if you’re moving your 401(k) funds from one company-sponsored retirement account to another.

A direct transfer, or direct rollover, is exactly what it sounds like: The money moves directly from your old account to the new one. In other words, you never have access to the money, which means you don’t have to worry about any tax withholdings or other liabilities.

Depending on your account custodian(s), this transfer may all be done digitally via ACH transfer, or you may receive a paper check made payable to the new account. Either way, this is considered the simplest option, and one that keeps your retirement fund intact and growing with the least possible interruption.

Another viable, but slightly more complex, option, is to do an indirect transfer or rollover, in which you cash out the account with the express intent of immediately reinvesting it into another retirement fund, whether that’s your new company’s 401(k) or an IRA (see above).

But here’s the tricky part: Since you’ll actually have the cash in hand, the government requires your account custodian to withhold a mandatory 20% tax. And although you’ll get that 20% back in the form of a tax exemption later, you do have to make up the 20% out of pocket and deposit the full amount into your new retirement account within 60 days.

For example, say you have $50,000 in your old 401(k). If you elected to do an indirect transfer, your custodian would cut you a check for only $40,000, thanks to the mandatory 20% tax withholding.

But in order to avoid fees and penalties, you’d still need to deposit the full $50,000 into your new retirement account, including $10,000 out of your own pocket. In addition, if you retain any funds from the rollover, they may be subject to an additional 10% penalty for early withdrawal.

Option 4: Cashing Out Your 401(k)

One recent review of 401(k) accounts found that 21% of Americans who left their jobs during the pandemic also cashed out their 401(k) accounts. Generally speaking, withdrawing these retirement funds is not a good idea, and here’s why.

Because a 401(k) is an investment account designed specifically for retirement, and comes with certain tax benefits — e.g. you don’t pay any tax on the money you contribute to your 401(k) — the account is also subject to strict rules regarding when you can actually access the money, and the tax you’d owe when you did.

Specifically, if you take out or borrow money from your 401(k) before age 59 ½, you’ll likely be subject to an additional 10% tax penalty on the full amount of your withdrawal — and that’s on top of the regular income taxes you’ll also be obligated to pay on the money.

Depending on your income tax bracket, that means an early withdrawal from your 401(k) could really cost you, not to mention possibly leaving you without a nest egg to help secure your future.

This is why most financial professionals generally recommend one of the next two options: rolling your account over into a new 401(k), or an IRA if your new job doesn’t offer a 401(k) plan.

Option 5: Rolling Your 401(k) Over to a Self-Directed IRA

A self-directed IRA, sometimes called a SDIRA, is an unusual type of retirement account — and it’s not widely available. That’s because these types of accounts aren’t just for traditional securities, but for alternative investments normally not permitted in traditional IRAs: i.e. real estate, collectibles (like art and jewelry), commodities, precious metals, and more.

These accounts are considered self-directed because, first, they are only available through certain financial firms that will custody SDIRA accounts, not manage them. Second, SDIRA custodians can’t give financial advice, so all the due diligence and asset management falls to the investor.

While you can consider doing a rollover to a SDIRA, be sure that setting up such an account makes sense for your current holdings, or whether a traditional IRA or Roth might do just as well.

The Takeaway

It’s not difficult to rollover your 401(k), and doing so can offer you a number of advantages. First of all, when you leave a job you may lose certain benefits and terms that applied to your 401(k) while you were an employee. Once you move on, you may pay more in account fees, and you will likely lose the ability to keep contributing to your account.

Rolling over your 401(k) — to a new employer’s plan, or to an IRA — gives you more control over your retirement funds, and could also give you more investment choices.

There are some instances where you may not want to do a rollover, for instance when you own a lot of your old company’s stock, so be sure to think through your options.

If you know that moving your 401(k) money over to an IRA is the right thing, SoFi makes it super easy. Once you open an investment account with SoFi Invest and set up a traditional or Roth IRA account, you can transfer the funds from your old 401(k) and either keep the same (or similar investments), or choose new ones.

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

How can you roll over a 401(k)?

It’s fairly easy to roll over a 401(k). First decide where you want to open your rollover account (usually an IRA), then contact your old plan’s administrator, or your former HR department. They typically issue a check that can be sent directly to you or to the rollover account at a new institution.

What options are available for rolling over a 401(k)?

There are several options for rolling over a 401(k), including transferring your savings to a traditional IRA, or to the 401(k) at your new job. You can also leave the account where it is, although this may incur additional fees. It’s generally not advisable to cash out a 401(k), as replacing that retirement money could be challenging.

Does SoFi allow you to roll over your 401(k)?

Yes, you can rollover funds from a 401(k) to a rollover IRA with SoFi.

To initiate the rollover, set up an account with SoFi Invest, and contact your 401(k) plan administrator or the HR department of your previous employer.

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