What does EBITDA Stand For?

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. Here’s a quick breakdown of each letter of the acronym:

Terminology Archives

Q: Why is EBITDA Important?

By using the EBITDA formula, investors can quickly compare several companies they might be interested in investing in. EBITDA is a tool used by many financial advisors to help their clients make investment decisions and to build portfolios. It’s also useful for business owners to calculate their EBITDA each year to see how their company is performing.

Jun

2026

How to Calculate EBITDA: Formula & Equations

By Julia Califano | Growing Wealth, Investing, Terminology | Comments Off

Table of Contents

What Is EBITDA?
The EBITDA Formula and Equation
EBITDA vs. Other Income Metrics
Why Is EBITDA Important?
What Makes a Good EBITDA?
EBITDA Margin
The EBITDA Coverage Ratio
Limitations of the EBITDA Formula
FAQ

Net income (final profit) tells you exactly how much money a business retains to either reinvest or return to shareholders. But this metric can also be misleading because it includes non-cash accounting expenses (such as depreciation) and external variables (such as interest paid on loans and taxes). To get a clearer sense of a company’s operational profitability, many investors and analysts prefer to look at EBITDA: earnings before interest, taxes, depreciation, and amortization.

EBITDA focuses on core business operations and removes financing choices, tax structures, and accounting estimates. This can make it easier to compare companies in the same industry, even if they have different debt loads, tax rates, or physical assets.

Understanding EBITDA can help investors gauge a company’s operating performance. What follows is a closer look at how this financial metric works, the formula for EBITDA, how to calculate it from a company’s financial statements, why it matters, and some important limitations to keep in mind.

Key Points

• EBITDA stands for earnings before interest, taxes, depreciation, and amortization and is used to evaluate a company’s profitability.

• This metric provides a view of core operational health by removing the influence of external factors like tax strategy, capital structure, and asset accounting.

• By excluding these financial variables, EBITDA makes it easier to compare companies operating within the same industry.

• The standard EBITDA formula starts with net income and adds back interest, taxes, depreciation, and amortization.

• Investors will want to use EBITDA cautiously because it excludes significant costs like capital expenditures, debt obligations, and taxes.

What Is EBITDA?

EBITDA (earnings before interest, taxes, depreciation, and amortization) is a popular financial metric used to evaluate a company’s profitability. It offers a way of looking at a company’s earnings without the effects of interest, taxes, and certain non-cash accounting expenses.

When you’re actively investing in stocks, EBITDA can provide a clearer, apples-to-apples comparison of company performance. Because similar businesses can have very different tax rates, debt levels, or accounting practices, comparing them directly is often challenging. EBITDA helps level the playing field by removing the impact of these variables.

Here’s what each letter represents:

Earnings

Earnings are generally a company’s net income over a specific period, such as a quarter or fiscal year. This is the “bottom line” on the income statement after all expenses are deducted from revenue.

Some EBITDA equations start with operating income (EBIT), which is earnings before interest and taxes.

Interest

This refers to any interest a company pays on loans and debt obligations. In some cases, companies may also report interest income. In those situations, analysts may use net interest expense (interest expense minus interest income).

Interest is added back to earnings because financing decisions vary widely from one company to another. When evaluating stocks, removing interest expenses can make comparison between companies easier.

Taxes

Federal, state, local, and international taxes are also added back because tax burdens can vary significantly based on location, business structure, and tax strategies. As a result, taxes are generally not considered a direct measure of operating performance.

Depreciation & Amortization

Depreciation allocates the cost of tangible assets, such as equipment, vehicles, and buildings, over their useful lives. Amortization performs a similar function for intangible assets, such as patents, trademarks, or copyrights.

Both are added back to earnings because they are non-cash expenses. This allows investors to focus more closely on operating performance before the impact of historical asset purchase and accounting practices.

Recommended: Stock Market Basics for Beginners

The EBITDA Formula and Equation

If a company doesn’t report EBITDA directly, you can calculate it using information from its statements. Net income, taxes, and interest expenses can generally be found on the income statement (also known as a profit and loss statement), while depreciation and amortization may appear on the cash flow statement or in the notes to the financial statements.

How to Calculate EBITDA From Net Income

The equation for EBITDA using net income is:

EBITDA = Net Income + Taxes + Interest Expense + Depreciation + Amortization

Example:

Suppose a company reports:

• Net income: $2,000,000

• Taxes: $500,000

• Interest expense: $300,000

• Depreciation: $150,000

• Amortization: $50,000

The calculation would be:

EBITDA = $2,000,000 + $500,000 + $300,000 + $150,000 + $50,000

EBITDA = $3,000,000

It’s possible for EBITDA to be negative if a company experiences significant operating losses during a quarter or year.

How to Calculate EBITDA From Operating Income

The equation for EBITDA using operating income is:

EBITDA = Operating Income (EBIT) + Depreciation + Amortization

Using the same example above:

• EBITDA: $3,000,000

• Depreciation: $150,000

• Amortization: $50,000

Operating income (EBIT) would equal:

$3,000,000 – $150,000 – $50,000 = $2,800,000

Using the EBIT formula:

EBITDA = $2,800,000 + $150,000 + $50,000

EBITDA = $3,000,000

This demonstrates how both EBITDA formulas arrive at the same result when using the same underlying financial data.

EBITDA vs. Other Income Metrics

There are several different ways to evaluate a company’s financial performance, and each metric offers a different perspective. Depending on which measure you use, you may gain insights that another metric doesn’t provide.

For investors who want to analyze a stock before buying, it’s often helpful to look at multiple financial metrics rather than relying on any single figure.

Here are a few common measurements of company income:

• Cash flow: This represents the total amount of money and cash equivalents moving into and out of a business. It provides insight into a company’s liquidity and ability to pay bills, fund operations, and invest in growth.

• EBIT: Earnings before interest and taxes (EBIT), also known as operating income, adds back interest and tax expenses but continues to include depreciation and amortization.

• EBT: Earnings before tax (EBT) removes the impact of income taxes but includes interest expenses. It can help investors compare profitability across companies operating in different tax jurisdictions.

• Net income: Often referred to as the “bottom line,” net income represents profit after all expenses — including interest, taxes, depreciation, and amortization — have been deducted from revenue.

• Revenue: This is the total amount of money generated from the sale of goods or services before any expenses are subtracted. Because it appears at the top of the income statement, it is often referred to as the “top line.”

Understanding company performance can be a complex endeavor, which is why investors frequently use a combination of metrics, including EBITDA, cash flow, and net income. Many investors will also perform a fundamental analysis to assess individual stocks.

Why Is EBITDA Important?

Whether you’re looking to make a short- or long-term investment, calculating EBITDA can be useful because it provides insight into a company’s operating profitability. By removing interest, taxes, and certain non-cash accounting expenses, investors can focus more closely on the earnings generated by a company’s core business activities.

EBITDA can also help standardize comparisons between companies in the same industry. Since different businesses may have different capital structures, debt levels, and tax obligations, EBITDA can make it easier to evaluate operation performance without those factors influencing the results.

Business owners may also use EBITDA to assess core operating performance and compare their companies to competitors.

What Makes a Good EBITDA?

A “good” EBITDA depends on a company’s industry, size, stage of growth, and capital structure. Because EBITDA can vary widely between industries, there is no universal benchmark that applies to every business.

Rather than focusing solely on the EBITDA figure itself, analysts often compare a company’s EBITDA to its historical performance and to that of similar companies in the same industry.

EBITDA Margin

EBITDA margin measures a company’s operating profitability as a percentage of total revenue. It indicates how much operating earnings a business generates for each dollar of revenue before interest, taxes, depreciation, and amortization are considered.

The EBITDA margin formula is:

EBITDA Margin = EBITDA ÷ Total Revenue

The result is expressed as a percentage. For example, if a company generates $2 million in EBITDA on $10 million in revenue, its EBITDA margin is 20%.

Generally speaking, a “good” EBITDA margin is 15% or higher. However, what qualifies as a strong EBITDA margin varies by industry. For this reason, investors typically compare a company’s EBITDA margin to those of its industry peers.

The EBITDA Coverage Ratio

The EBITDA coverage ratio is a metric often used by lenders to assess a company’s ability to cover fixed financial obligations, such as interest payments, debt repayments, and lease obligations, using its core operating earnings.

The formula is:

EBITDA Coverage Ratio = (EBITDA + Lease Payments) ÷ (Interest Payments + Principal Payments + Lease Payments)

In general, a higher ratio indicates a stronger ability to meet financial obligations.

While standards vary by lender and industry, a ratio of 2.0 or higher is often viewed favorably. Ratios between 1.5 and 2.0 may be considered acceptable, while ratios below 1.2 may signal financial risk.

Limitations of the EBITDA Formula

Although EBITDA can be a useful analytic tool, it also has several limitations investors will want to keep in mind:

• It omits capital expenditures. EBITDA does not account for the cost of maintaining or replacing equipment, facilities, and other long-term assets. In capital-intensive industries, these costs can be substantial.

• It ignores debt and taxes. Interest and taxes are real expenses that affect a company’s financial health. By excluding them, EBITDA may make highly leveraged companies appear stronger than they actually are.

• It is not a GAAP measure. EBITDA is not recognized under generally accepted accounting principles (GAAP). Because there is no single standardized calculation, companies may make different adjustments when reporting EBITDA, which can limit comparability.

For these reasons, EBITDA is generally most useful when analyzed alongside other financial metrics rather than in isolation.

The Takeaway

Comparing companies can take time and careful analysis. EBITDA is one measure that can be useful because it starts with earnings and removes the effects of interest, taxes, depreciation, and amortization. This can make it easier to compare companies within the same industry and evaluate the profitability of their core operations.

While EBITDA can provide valuable insight into a company’s operating performance, it doesn’t tell the whole story. Investors often review EBITDA alongside other financial metrics, such as cash flow, revenue growth, debt levels, and net income, to gain a more complete understanding of a company’s financial health and prospects.

For investors interested in learning more about specific companies and building a stock portfolio, opening an online brokerage account can be a good way to get started with investing.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

FAQ

Where do I find EBITDA on an income statement?

EBITDA (earnings before interest, taxes, depreciation, and amortization) does not typically appear directly on a company’s income statement because it is a non-GAAP metric. However, you can often calculate it using information from the income statement, cash flow statement, and notes to the financial statements. Some companies also report EBITDA in earnings releases and investor presentations.

Is EBITDA the same as gross profit?

No. Gross profit equals revenue minus the direct costs associated with producing goods or services. EBITDA is a broader profitability measure that also takes operating expenses into account while excluding interest, taxes, depreciation, and amortization.

Why do investors prefer EBITDA over net income?

Some investors use EBITDA (earnings before interest, taxes, depreciation, and amortization) because it removes the effects of financing decisions, tax structures, and certain non-cash accounting expenses. This can make it easier to compare companies within the same industry. However, EBITDA is generally most useful when considered alongside net income and other financial metrics.

Can EBITDA be a negative number?

Yes. EBITDA (earnings before interest, taxes, depreciation, and amortization) can be negative if a company’s operating expenses exceed its revenue. Negative EBITDA may indicate that a company is struggling to generate earnings from its core business operations.

Is a higher EBITDA always better?

Not necessarily. While a higher EBITDA (earnings before interest, taxes, depreciation, and amortization) may indicate stronger operating profitability, it does not account for debt, taxes, capital expenditures, or cash flow. Investors should consider EBITDA alongside other financial measures when evaluating a company’s overall financial health.

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

SOIN-Q226-026

Jun

2026

A pen lies on top of a spreadsheet and a stock chart, indicating that someone is calculating the yield from their investments.

What Is Yield in Finance?

By SoFi Editors | Growing Wealth, Investing, Terminology | No Comments

Table of Contents

What Does Yield Mean in Finance?
How Do You Calculate Yield (Formula)?
Types of Yield in Investing
FAQ

While “return” refers to a security’s gain or loss in value, the yield is what a security such as a stock or bond pays investors over time, expressed as a percentage.

Yield is typically calculated by taking the dividend, coupon, or net income earned, dividing that amount by the value of the investment, then calculating the result as a percentage.

While both yield and return are measures of performance, yield is a way to track how much income was earned over a set period, relative to the initial cost of the investment or the market value of the asset. While all investments have some kind of rate of return, not all investments have a yield, because not all investments produce interest or dividends.

Key Points

• Yield is defined as the income a security pays the investor relative to its value, expressed as a percentage, which is only a portion of the total return.

• The basic yield formula involves dividing the net realized income (dividend, coupon, or net income) by the investment’s principal or value.

• Yield-generating investments span a range of risk profiles, from low-risk cash equivalents and fixed-income securities to higher-risk equities and real estate.

• When calculating yield, investors can use cost yield (based on the original purchase price) or current yield (based on the asset’s current market price).

• Key types of yield include the dividend yield for stocks, the yield-to-maturity for bonds, and the annual percentage yield (APY) for bank accounts.

What Does Yield Mean in Finance?

Yield refers to the income the security pays the investor relative to its value, expressed as a percentage. Understanding what yield means is important for investors because it’s a useful performance metric, and it’s considered part of the overall return, whether you’re trading stocks, buying bonds or purchasing other investments.

Yield-generating investments fall into a few basic categories, which range from lower-risk investments to higher-risk types of securities:

• Cash equivalents. These can include high-yield savings accounts as well as certificates of deposit (CDs) and money market funds. Because the yield from cash equivalents is guaranteed, these are considered low risk and they have commensurately low yields.

• Fixed-income securities. The bond market includes a range of fixed-income options (e.g., from corporate bonds to municipal bonds to US Treasurys). And these pay a fixed rate of interest, which provides predictable income. As such bonds are considered low to moderate risk investments.

• Equities. Although stocks can be more volatile and are considered higher risk, some stocks pay dividends — a portion of earnings or profits — at a rate that may be appealing to investors, whether they’re investing online or through a regular brokerage.

• Real estate. Generally considered a type of alternative investments, real estate yields generally don’t move in sync with conventional stock and bond markets, and as such can provide diversification. That said, like most alternative investments, real estate can be high risk and illiquid.

It’s also possible for investors to purchase certain types of exchange-traded funds (ETFs) and mutual funds that include yield-paying securities (e.g., bond funds).

Recommended: Stock Market Basics for Beginners

How Do You Calculate Yield (Formula)?

Yield is typically calculated annually, but it can also be calculated quarterly or monthly.

Basic Yield Formula

Yield is calculated as the net realized income divided by the principal invested amount. Another way to think about yield is as the investment’s annual payments divided by the cost of that investment.

Here are formulas depending on the asset:

• Stocks: Dividends Per Share/Share Price X 100%

• Bonds: Coupon/Bond Price X 100%

• Real Estate: Net Income From Rent/Real Estate Value X 100%

For example, if a $100 stock pays out a $5 dividend for the year, then the yield for that year is 5 ÷ 100 X 100%, or a 5% yield.

Cost Yield vs. Current Yield

One important thing to think about when doing yield calculations is whether you’re looking at the original price of the stock or the current market price. (That can also be referred to as the current market value or face value.)

For example, in the above example, you have a $100 stock that pays a $5 dividend per share. If you divide that by the original purchase price, then you have a 5% yield. This is also known as the cost yield, because it’s based on the cost of the original investment.

However, if that $100 stock has gone up in price to $120, but still pays a $5 dividend, then if someone bought the stock right now at $120, it would be a 2.4% yield, because it’s based on the current price of the stock. That’s also known as the current yield.

Yield vs Return: What’s the Difference?

Calculating rate of return, by comparison, is done differently. Yield is simply a portion of the total return.

For example, if that same $100 stock has risen in market price to $120, then the return includes the change in stock price and the paid out dividend: [(120-100) + 5] ÷ 100, so 0.25, or a 25% total return.

The reason this matters is because the rate of return can change if the stock price changes, but often the yield on an investment is established in advance and generally doesn’t fluctuate too much.

Types of Yield in Investing

Given the size and scope of the US stock market, it’s not surprising that investors interested in yield-producing investments have several options.

Dividend Yield in Stocks

When you make money on stocks it often comes in two forms: as a dividend and/or as an increase in the stock price. If a stock pays out a dividend in cash to stockholders, the annual amount of those payments can be expressed as a percentage of the value of the security. This is the yield.

To better understand what a dividend is, many stocks actually pay out dividends quarterly. In order to calculate the annual yield, simply add up all the dividends paid out for the year and then do the calculation. If a stock doesn’t pay a dividend, then it doesn’t have a dividend yield.

Note that real estate investment trusts (REITs) are required to pay out 90% of their taxable income to existing shareholders in order to maintain their status as a pass-through entity. That means the yield on REITs is typically higher than for other stocks, which is one of the pros for REIT investing.

Sometimes investors also calculate a stock’s earnings yield, which is the earnings over a year, dividend by the share price. It’s one method an investor may use to try to value a stock.

Yield-to-Maturity in Bonds

When it comes to bonds vs. stocks, the yield on a bond is the interest paid — which is typically stated on the bond itself. Bond interest payments are usually determined at the beginning of the bond’s life and remain constant until that bond matures.

However, if you buy a bond on the secondary market, then the yield might be different than the stated interest rate because the price you paid for the bond was different from the original price.

For bonds, yield is calculated by dividing the yearly interest payments by the payment value of the bond. For example, a $1,000 bond that pays $50 interest has a yield of 5%. This is the nominal yield. Yield-to-maturity calculates the average return for the bond if you hold it until it matures based on your purchase price.

Some bonds have variable interest rates, which means the yield might change over the bond’s life. Often variable interest rates are based on the set U.S. Treasury yield.

APY in Bank Accounts

The definition of APY, which refers to annual percentage yield, shows the total compound interest that certain types of accounts, such as a high-yield savings account or a CD, earn in one year, expressed as a percentage.

An APY includes the effect of compound interest, which is when you earn interest on the principal as well as on the interest as it accrues. Because you can earn more interest with more frequent compounding (e.g., monthly vs. yearly), it’s important for investors who are considering different types of cash equivalents to examine the APY.

The Takeaway

A high yield investment generally means more cash flow, which can add to your returns. But a yield that is too high isn’t necessarily a good thing. It could mean the market value of the investment is going down or that dividends being paid out are too high in light of the company’s earnings.

Of course, yield isn’t the only thing you’re looking for in your investments. You may want to consider other aspects of the stocks you’re choosing: the history of the company’s growth and dividends paid out, potential for future growth or profit, the ratio of profit to dividend paid out. You may also want a diversified portfolio made up of different kinds of assets to balance return and risk.

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FAQ

What is a good yield for an investment?

Different securities offer different yield amounts, with lower-risk investments generally providing lower yields (and higher-risk investments potentially offering higher yields). Investors need to become familiar with the yield range of, say, cash equivalents vs. stocks and stocks vs. bonds before choosing an investment.

Why do bond yields fluctuate?

A bond’s price moves in the opposite direction of its yield. So when the bond price rises, the yield drops. When the bond price drops, the yield rises.

Can investment yields be negative?

Yes, yields on bonds, real estate, and even stocks can be negative under the right conditions.

Is yield the same as profit?

No. Although an investor’s profit can include yield, yield actually refers to the payout from certain types of investments over time, relative to the market value of the security.

Are high-yield investments risky?

Yes, generally speaking, the higher the yield the higher the risk.

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Mutual Funds (MFs): Investors should read and carefully consider the information contained in the prospectus, which contains the Mutual Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or SoFi's customer service at: 1.855.456.7634. Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risks. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may have tax implications.

Investment Risk: Diversification can help reduce some investment risk, but cannot guarantee profit nor fully protect in a down market.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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.

Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.

SOIN-Q226-013

Jun

2026

A young woman with hair in a ponytail looking confused as she sits and reads the document she is holding.

Guide to Bank Affidavits

By Mike Zaccardi, CMT, CFA | Financial Independence, money, Terminology | Comments Off

Table of Contents

What Is a Bank Affidavit?
How Does a Bank Affidavit Work?
Reasons Why Someone Needs a Bank Affidavit
How to Write an Affidavit
Where Can I Get a Bank Affidavit?
FAQ

A bank affidavit is a legal document that proves a person’s relationship with a financial institution. An affidavit can also help with financial fraud matters and the immigration process by the use of official signatories and witnesses to ensure proper document completion.

Typically, banks and embassies are places to find a bank affidavit document. Learn more about these important documents and how they work.

Key Points

• A bank affidavit is a legal document confirming certain financial details.

• It’s usually signed by a bank official and usually requires at least one witness.

• An affidavit is typically made under oath and is notarized or administered by an officer of the court.

• A bank affidavit can verify financial information, such as bank account ownership and transaction history.

• It’s commonly used as proof of financial support in immigration applications.

What Is a Bank Affidavit?

A bank affidavit is a legal document that attests to someone’s relationship with a financial institution. A bank or credit union can verify certain aspects of a person’s financial activities with this document. A bank affidavit is commonly used for investigative cases of potentially fraudulent activity or in matters involving an immigration application.

Incidentally, you may also sometimes hear the phrase self-proving affidavit. This is somewhat different. It’s a document that can be created when making a will. It helps prove the validity of a will. While an important legal document, it’s not the same thing as a bank affidavit.

Banking customers might wonder what a bank affidavit is and how it’s created.

• When requesting this legal document, you must appear at a bank and have the affidavit completed and signed by an authorized individual of the bank or credit union.

• A bank affidavit often requires at least one witness to ensure the accuracy and completeness of all required information.

A bank affidavit is often used to protect customers from nefarious individuals seeking to swindle people out of their savings. This document can be used to assert that fraudulent transactions were conducted and are not the responsibility of the bank customer (aka the victims of the crime). Beyond fraud cases, immigration applications sometimes request proof of financial support, and a bank affidavit helps provide that documentation.

How Does a Bank Affidavit Work?

A bank affidavit works by providing official verification of a person’s or business’s financial account holdings and their relationship with a bank or credit union. This is similar to the process used with an affidavit of title in the home-buying process.

An affidavit is a written statement of facts confirmed by the oath of the party making it. Affidavits must be notarized or administered by an officer of the court with such authority.

A bank affidavit, in particular, works by attesting to certain financial details of a person or legal entity. Banking representatives are the signatories, while witnesses ensure that the details are correct and that the document is completed properly. This process goes a long way in proving the financial standing of the account holder or immigration applicant. These documents can help move matters along through the proper channels, especially in cases of suspected fraud or in the immigration process.

Once completed, the bank affidavit should be securely stored, perhaps in a safe or a safety deposit box at a bank. You likely want to be sure that only individuals you trust and who are authorized to view your personal information have access to the document. Also, bear in mind that when this sort of legal filing is handled by the court system and other government agencies, they’re obligated to keep it confidential. Authorized officials must act in a manner to ensure your personal information stays private.

Recommended: Guide to Bank Account Closure Letters

Reasons Why Someone Needs a Bank Affidavit

A bank affidavit is necessary when instances of financial crime are suspected, as well as for immigration purposes. Here’s a closer look.

• Financial crime: Fraudulent activity is a serious white-collar crime in today’s banking world, and financial institutions must take steps to ensure the safety of customer accounts. It’s worthwhile to bank with a financial institution that uses strict fraud protection and security control measures so that you have the best possible security for your accounts.

When needing a bank affidavit, a customer requests a legal document from the financial institution that cites the fraudulent transactions. The affidavit often indicates that financial damages as a result of the malicious activity are not the responsibility of the banking customer in a statement of unauthorized debt. The bank affidavit can then be used in a court of law if any further legal action is taken. Moreover, the affidavit is helpful in a situation involving a business that’s being targeted for illegal financial activity.

• Immigration issues: Immigration applicants seeking to legally prove financial support commonly request a bank affidavit, too. In these instances, a bank affidavit demonstrates that a person can financially support the immigrant. The affidavit is also used to outline the individual’s bank account information and holdings. People with a poor credit history can also open a second chance checking account to begin improving their financial footing.

In the immigration process, a bank affidavit is used to prove that the applicant can financially support themself with monetary savings and with financial help from family and friends. Those who can’t demonstrate a solid financial footing might get turned down due to the possibility of winding up in welfare programs.

How to Write an Affidavit

If you need to write an affidavit, here are the five steps to follow:

1. Visit a bank or a credit union if you need the affidavit for financial matters. In cases of immigration, you may also travel to a country’s embassy to find blank forms to fill out.

2. Complete the form to the best of your ability and request assistance from bank representatives or embassy officials for any information you’re unsure about. It can be helpful to have the institution fill out the form to avoid mistakes.

3. Check that the bank affidavit form is properly filled out and the details are verified for their accuracy, then ensure that all necessary signatures are on it and that witnesses attest to the affidavit’s completion.

4. Create a copy of the legal document and store it in a secure location. This provides a backup should the original get lost, stolen, or damaged.

5. Keep the bank affidavit as a receipt if you’re an immigration applicant to help expedite the process.

Where Can I Get a Bank Affidavit?

You can visit a bank or credit union branch to request a bank affidavit. However, not all locations may have the necessary individuals available to provide the required signatures. It can be worthwhile to check in about this in advance. This legal document is usually available at a nation’s embassy, too.

You must complete the form and sign where indicated. It’s sometimes preferable to have the banking or embassy officials fill out the form as much as possible to avoid incorrect details on the document.

The Takeaway

Bank affidavits can be important tools if you’re trying to clear up fraudulent activity on your account or if you’re working your way through immigration procedures. These forms will need to be carefully filled out, signed, and witnessed, but they play a vital role in certain circumstances. Your financial institution or embassy can partner with you to get this document completed.

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Better banking is here with SoFi, named the #1 Bank in the U.S. for the fourth year in a row by Forbes (2026).* Enjoy up to 3.10% APY on SoFi Checking and Savings.

FAQ

How do I write a bank affidavit?

Visit a bank or an embassy to request a form. You’ll need signatures from certain officials, and you’ll likely need witnesses to the document being completed. It might be easier to have the institution write the bank affidavit for you to prevent any inaccuracies or other errors.

Why do banks ask for an affidavit?

Banks might ask for an affidavit to prove certain details associated with their customers. A common reason a bank affidavit is necessary involves situations where a checking or savings account was used fraudulently. Also, a bank might want the assurance that an immigration applicant has good financial standing.

Where can I get a bank affidavit?

You can usually get a bank affidavit at a bank or credit union branch. In addition, an embassy may have the forms. Keep in mind that you likely need the forms notarized, so it’s a good idea to make sure a notary is available when you want to complete the documents.

Photo credit: iStock/fizkes

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2026 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 5/28/26. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
^Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

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*Awards or rankings from Forbes 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.

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

SOBNK-Q126-100

Jun

2026

A dark-haired woman in a polka dot shirt sits on a gray couch looking at some papers in her hands.

What Is a Revolving Letter of Credit and How Does It Work?

By Austin Kilham | Credit, money, Terminology | Comments Off

Table of Contents

What Is a Revolving Letter of Credit?
How Does a Revolving Letter of Credit Work?
Types of Revolving Letters of Credit
Advantages of Revolving Letters of Credit
Disadvantages of a Revolving Letter of Credit
FAQ

This content may include information about products, features, and/or services that SoFi does not provide and is intended to be educational in nature.

A revolving letter of credit is a financial instrument often used in international trade to facilitate transactions between buyers and sellers. It is a type of letter of credit that allows the buyer to make multiple drawdowns (or “draws”) within a specified period, typically a year, up to a certain limit.

If you’re in the business of importing and exporting, or any type of buying and selling, a revolving letter of credit may allow for smoother transactions. Once in place, it can allow both buyers and sellers to be more confident in their business arrangements. It also helps to ensure that goods arrive and that all payments are made on time.

Here, we’ll look at the specifics of revolving letters of credit. We’ll dive into:

• What is a revolving letter of credit

• How a revolving letter of credit works

• The different types of revolving letters of credit

• Limitations of revolving letters of credit

• The pros and cons of a revolving letter of credit

Key Points

• With a revolving letter of credit, a buyer can make multiple drawdowns, up to a certain limit, within a specific period of time.

• The revolving letter of credit is issued by the buyer’s bank.

• There are generally two types of revolving letters of credit: time-based and value-based.

• Because it is revolving, the letter of credit does not need to be reissued for each transaction during a set period.

• Bank fees may make revolving letters of credit expensive, especially for applicants.

What Is a Revolving Letter of Credit?

When you hear the phrase “revolving credit,” it may sound familiar from personal finance tools you’ve used, such as credit cards and home equity lines of credit. These revolving credit accounts have a credit limit, which represents the maximum amount that you can spend. You can draw on the account up to the limit. Then, as you pay back the amount you owe, the amount of credit will increase, returning to its original value.

Like the revolving credit you use in your personal finances, revolving letters of credit help streamline financial transactions. However, they work in a different way.

Revolving letters of credit can offer convenience and added flexibility for buyers and sellers engaged in ongoing trade relationships, as they eliminate the need to establish a new letter of credit for each transaction. More specifically, they are used to facilitate the regular shipments of goods or the delivery of services between buyers and sellers. You often see them in international trade, in which the buyer and seller are operating in two different places and/or regulatory environments.

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How Does a Revolving Letter of Credit Work?

Here’s a step-by-step look at how revolving letters of credit work in the business world:

Opening the letter of credit: The buyer and seller agree to use a revolving letter of credit for their transactions. The buyer applies for the letter of credit from their bank (called the issuing bank) and specifies the terms and conditions, including the amount and validity period.

Issuance: The issuing bank issues the letter of credit, which serves as a guarantee to the seller that they will receive payment for the goods or services as long as they comply with the terms and conditions of the letter of credit.

Shipment and presentation of documents: The seller ships the goods or provides the services to the buyer and prepares the necessary documents as specified in the letter of credit, such as invoices and packing lists.

Drawdown: Upon shipment, the seller presents the required documents to the issuing bank through their own bank (called the advising bank) to request payment. The issuing bank examines the documents and, if they comply with the terms of the letter of credit, makes payment to the seller.

Revolving feature: After the first drawdown, the letter of credit does not expire. The buyer can continue to make additional drawdowns up to the specified limit and within the validity period of the letter of credit without the need for the issuing bank to issue a new letter of credit.

Payment and settlement: The buyer is required to repay the issuing bank for the amount of each drawdown, typically on a predetermined schedule. The buyer can also choose to pay the entire outstanding balance at once.

Renewal: Once the specified period or limit is reached, the letter of credit can be renewed by the buyer and the issuing bank if both parties agree.

Recommended: How to Build Credit Over Time

Types of Revolving Letters of Credit

Revolving letters of credit can generally be subdivided into two main categories, one based on value and the other based on time.

Time-Based Revolving Letter of Credit

Some revolving letters of credit are based on time. This means a specific payment amount can be drawn down over a set period. For example, an importer could have a revolving letter of credit worth $120,000 drawn to cover a 6-month period. During that time, payments of $20,000 could be made to an exporter each month. At the end of the 6-month period, the revolving letter of credit expires.

Cumulative Revolving Letter of Credit

The time-based revolving letter of credit can be divided into two subcategories: cumulative and noncumulative revolving letters of credit. If the revolving letter of credit is cumulative, then previously unused limits can be shifted ahead and used in subsequent time periods. In the example above, if the exporter doesn’t ship any goods in the second month, then it could ship $40,000 worth of goods in the third month.

This type of set-up provides the seller with a certain amount of flexibility. However, it can be riskier for the buyer who isn’t receiving goods regularly.

Recommended: How Many Lines of Credit Should I Have?

Noncumulative Revolving Letter of Credit

The other type of time-based revolving letter of credit is noncumulative. This means that previously unused amounts of credit cannot be rolled over into a subsequent month. So, if the exporter in the example above doesn’t ship any goods in the second month, only $20,000 worth of goods can be shipped in each of the subsequent months.

This set-up is less risky for the buyer, because it locks the seller into shipping goods within a narrower time period and under more specific conditions. If the seller doesn’t supply the promised goods within a certain period, they cannot carry that over into a subsequent period.

Value-Based Revolving Letter of Credit

The other main type of revolving letter of credit is the value-based revolving letter of credit. It’s much like its time-based counterpart. The biggest difference is that payment from the buyer is only released when they receive goods worth a certain value.

Say, for example, a revolving letter of credit is issued for $120,000 over six months for goods worth $20,000 each month. The exporter can only ship and receive payment for goods worth $20,000 each month. If, for example, they are only able to produce $15,000 worth of goods in one month, they cannot ship the goods to the seller, and the seller won’t provide payment. In this case, the value is very specific, and it really matters.

When a buyer and seller enter into a large contract, they may enter into a standby letter of credit, especially if the buyer and seller don’t know one another. The buyer might create one to help secure a contract, or the seller might ask the buyer to obtain a letter.

Advantages of Revolving Letters of Credit

So why issue a revolving letter of credit? Here’s a look at some of the benefits that this financial instrument offers:

• It can save time and money.

• Because it is revolving, the letter of credit does not need to be reissued for each transaction during a set period.

• It helps facilitate regular trade between a buyer and a seller.

• It can help build trust between buyers and sellers.

• It can incentivize sellers to manufacture a consistent level of goods, especially for noncumulative and value-based letters.

• It can provide flexibility in terms of the types of agreements buyers and sellers can enter into.

Disadvantages of a Revolving Letter of Credit

Despite the advantages listed above, there are some limitations and drawbacks to consider:

• Letters of credit tend to be limited to one supplier only.

• They don’t apply to one-time transactions.

• Changes, such as changes to tax law, customs rules, or product design, may require amendments to the agreement.

• Bank fees may make revolving letters of credit costly, especially for applicants.

The Takeaway

If you run an importing business and you’re buying goods from overseas, especially from an exporter that represents a new business relationship, a revolving letter of credit can simplify things. It can remove some of the risk of the transactions as you build trust with this new supplier. Of course, if you’re an exporter, the same applies.

That said, it’s important to consider the limitations of using a letter of credit, in particular the cost, and weigh that against the benefits. Before agreeing to a revolving letter of credit, it’s important to explore how this financial instrument fits into your company’s overall needs and goals.

Better banking is here with SoFi, named the #1 Bank in the U.S. for the fourth year in a row by Forbes (2026).* Enjoy up to 3.10% APY on SoFi Checking and Savings.

FAQ

When should a revolving letter of credit be used?

Generally, a revolving letter of credit should be used when there is an ongoing business relationship between a buyer and a seller and the buyer needs to make multiple transactions over a period of time. It can be particularly useful for businesses that have regular import or export requirements and want to streamline the payment process.

Who issues the revolving letter of credit?

The revolving letter of credit is issued by the buyer’s bank. The seller’s bank may also be involved as the advising bank, but the issuing bank is the buyer’s bank.

What is an irrevocable revolving letter of credit?

An irrevocable revolving letter of credit is a type of revolving letter of credit that cannot be changed unless all parties involved agree to the modifications of the contract. This provides a high level of assurance to the seller that they will receive payment as long as they meet the terms and conditions of the letter of credit.

Photo credit: iStock/Morsa Images

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2026 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 5/28/26. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
^Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

We do not charge any account, service, or maintenance fees for SoFi Checking and Savings. We do charge transaction fees for outgoing wire transfers, Instant Transfers, and global remittance transfers. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
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.

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

SOBNK-Q126-083

Jun

2026

A woman using a laptop at a small table to research IRAs.

What Is an IRA?

By Pam O’Brien | Growing Wealth, invest, Investing, Terminology | No Comments

Table of Contents

What Is an IRA?
How Does an IRA Work?
Types of IRAs
IRA Contribution Limits
Do You Need Earned Income to Contribute to an IRA?
What Can You Invest in With an IRA?
Benefits of an IRA
IRA Rules and Potential Drawbacks
IRA vs. 401(k): What’s the Difference?
Which Type of IRA May Be Right for You?
When Is the IRA Contribution Deadline?
How to Open an IRA
IRA Withdrawal Rules to Know
FAQ

An individual retirement account, or IRA, is a tax-advantaged account designed to help you save and invest for retirement. Unlike a 401(k), which is offered through an employer, an IRA is opened by an individual through a brokerage, bank, or other financial institution. There are different types of IRAs, and contributions and withdrawals may be handled in various ways and receive different tax treatment.

IRAs are an option to explore if you don’t have access to a workplace retirement plan or you want to save even more for retirement. Here’s how IRAs work, the main types to know about, and what to consider before opening an IRA.

Key Points

• An IRA is a tax-advantaged account designed to help individuals save and invest for retirement.

• Traditional and Roth IRAs are the most common IRA types for individual savers.

• SEP and SIMPLE IRAs are often used by self-employed people and small businesses.

• Annual IRA contribution limits apply across traditional and Roth IRAs combined.

• IRAs can hold a range of investments such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs), depending on the provider.

• IRA withdrawals before age 59 ½ may be subject to taxes or penalties unless an exception applies.

What Is an IRA?

An IRA is a retirement account that can provide tax advantages while you save and invest for the future. An IRA allows money to potentially grow over the long-term with certain tax advantages.

There are different types of IRAs but two of the most common are traditional IRAs and Roth IRAs. Both types have the same contribution limits each year. A key difference between them is the way the two accounts are taxed.

With a traditional IRA, eligible contributions are tax-deductible upfront, and withdrawals in retirement are taxed as ordinary income. With a Roth IRA, contributions are made with after-tax dollars and are not tax deductible, but qualified withdrawals in retirement are tax-free.

How Does an IRA Work?

After opening an IRA, you fund it with contributions, then choose investments within the IRA. Depending on the provider, investment options may include mutual funds, exchange-traded funds (ETFs), stocks, bonds, certificates of deposit (CDs), and more.

An individual might also choose a managed portfolio for their IRA, in which a financial advisor or robo advisor manages the portfolio on their behalf, buying, selling, and overseeing assets within the IRA based on the individual’s goals and risk tolerance.

Here’s a quick and simple way to think about how an IRA works and what an individual needs to do to get started:

• Open an IRA with a brokerage, bank, online bank, or other financial institution.

• Choose the type of IRA that fits your situation, such as a traditional IRA or Roth IRA.

• Contribute money, subject to annual limits set by the IRS and eligibility rules.

• Invest the money in the account based on your goals, risk tolerance, and timeline.

• Let the account grow tax-deferred or potentially tax-free, depending on the IRA type chosen.

• Withdraw money in retirement according to IRA withdrawal rules.

It’s important to be aware that because investments in an IRA can rise or fall in value, it is possible to lose money with an IRA. The level of risk depends on how the account is invested as well as market performance.

Types of IRAs

As mentioned above, there are numerous types of IRAs. Some are designed for individual savers, while others are geared toward those who are self-employed, small-business owners, or beneficiaries who inherit an IRA.

It is possible to have multiple IRAs of virtually any type, but the rules governing the different plans and the contribution limits can be challenging to stay on top of.

Here’s an at-a-glance comparison of some of the common different types of IRAs and what you need to know about each.

Type of IRA	Designed for	Tax treatment	Key considerations
Traditional IRA	Individuals with earned income	Contributions may be tax deductible; withdrawals generally taxed as income	Deductibility of contributions may be limited; required minimum distributions (RMDs) typically apply
Roth IRA	Individuals with earned income who meet income eligibility rules	Contributions are made with after-tax dollars; qualified withdrawals are tax-free	Income limits may reduce or eliminate contributions; no RMDs for the original account holder
Rollover IRA	Individuals moving funds from a previous employer’s workplace plan	Rolling over the funds is typically tax-free; withdrawals are generally taxed.	There are different rollover options to understand and compare
SEP IRA	Self-employed individuals and small business owners	Contributions can only be made by an employer and are tax deductible; withdrawals are generally taxed	Higher contribution limits than traditional/Roth IRA
SIMPLE IRA	Small business owners and eligible employees	May be a Roth or traditional SIMPLE IRA with contributions and withdrawals taxed accordingly	Employer-sponsored plan with its own limits and rules
Custodial IRA	Minors with earned income	May be a Roth or traditional IRA	Adult custodian manages the account until the minor comes of age
Inherited IRA	Beneficiaries of IRAs	Taxes depend on account type and beneficiary status	Distribution rules are complex

Traditional IRA

A traditional IRA is a retirement account that allows individuals to make contributions with pre-tax dollars. Money in the account grows tax deferred and withdrawals are taxed in retirement. Contributions to a traditional IRA are generally tax deductible upfront and can lower an individual’s taxable income.

Withdrawals made before age 59 ½ are typically subject to taxes and a 10% early withdrawal penalty. Traditional IRA account holders must take required minimum distributions (RMDs) from the account beginning at age 73.

Traditional IRAs may be an option for people who want a possible tax break now and expect to be in a lower tax bracket in retirement. However, the ability to deduct contributions can depend on income, filing status, and whether you or your spouse are covered by a workplace retirement plan.

Calculate your IRA contributions.

Discover how much you can put into an IRA in 2024 using SoFi’s IRA contribution calculator.

Roth IRA

Contributions to a Roth IRA are made with after-tax dollars. There is no tax deduction for contributions, but money in the account grows tax-free and qualified withdrawals in retirement are tax-free.

Roth IRA withdrawal rules are more flexible than the rules for a traditional IRA. Contributions to a Roth can generally be withdrawn tax- and penalty-free any time. However, earnings withdrawn before age 59 ½ are subject to taxes and a 10% penalty. Roth IRAs are not subject to RMDs for the original account owner.

Roth IRAs may be an option for those who expect to be in a higher tax bracket in retirement, however, the amount an individual can contribute may be limited by their income and tax-filing status.

Rollover IRA

A rollover IRA is typically used to move money from an employer-sponsored retirement plan like a 401(k) after leaving a job. When a 401(k) is rolled over to an IRA, the money in the account remains tax-advantaged — meaning the individual typically does not pay taxes on it at that time. If you have a traditional 401(k), you can roll it over into a traditional IRA; if you have a Roth 401(k), you can roll it over into a Roth IRA. Withdrawals are taxed according to the usual traditional or Roth IRA rules.

Before completing a rollover, you can research your options. In addition to rolling over your 401(k) into an IRA, you might be able to keep your money in the former employer’s plan, move it to a new employer’s plan, or take a distribution. Each option has consequences, including tax implications, so it’s wise to explore them thoroughly before deciding.

SEP IRA

A Simplified Employee Pension (SEP) IRA gives self-employed people and small-business owners a way to contribute to their own and their employees’ retirement plans. Only an employer or self-employed individual can contribute to a SEP IRA, and contributions are significantly higher than they are for traditional IRAs or Roth IRAs. However, SEPs have specific guidelines for contributions.

SEPs follow the same rules as traditional IRAs regarding early withdrawal penalties and RMDs.

SIMPLE IRA

A Savings Incentive Match Plan for Employees, or SIMPLE IRA, is a type of traditional IRA that both employers and employees can contribute to. These plans are typically available to businesses with 100 employees or fewer.

Employees can make salary deferral contributions, and employers generally must make matching or nonelective contributions each year, even if employees don’t make a contribution to the plan.

SIMPLE IRAs have RMDs, and early withdrawals are generally subject to taxes and a penalty of at least 10%.

Custodial IRA

A custodial IRA is an IRA opened for a minor who has earned income. It can be set up as a traditional IRA or a Roth IRA. An adult custodian manages the account until the child reaches the age of majority, which can vary by state.

Inherited IRA

An inherited IRA is an account opened by someone (typically known as a beneficiary) who inherits an IRA. Beneficiaries cannot contribute additional funds to the IRA. Inherited IRA distribution rules can depend on the original account type, the beneficiary’s relationship to the original owner, and other factors.

Inherited IRA rules can be complex, so beneficiaries may want to consult a financial or tax professional.

IRA Contribution Limits

IRA contribution limits are set by the IRS and can change from year to year. If you have more than one traditional or Roth IRA, it’s important to be aware that the total annual limit applies across these accounts combined, not separately to each account.

Individuals ages 50 and up can make additional catch-up contributions to an IRA to help save for retirement. Limits for catch-ups are also set by the IRS.

Tax year	Under age 50	Age 50 and older (with catch-up contribution)
2025	$7,000	$8,000
2026	$7,500	$8,600

SEP IRAs, SIMPLE IRAs, and employer-sponsored retirement plans have separate contribution limits.

Do You Need Earned Income to Contribute to an IRA?

To contribute to a traditional or Roth IRA, you generally need earned income. Examples of earned income include wages, salaries, tips, commissions, bonuses, and net earnings from self-employment.

Investment income, Social Security benefits, pension income, and other income that is not related to working, such as income from a rental property, generally does not count as compensation for IRA contribution purposes.

One exception to the earned income rule is a spousal IRA. In the case of a married couple filing jointly with a nonworking spouse, the working spouse may be able to contribute to a spousal IRA for their partner as long as they have enough taxable compensation and meet other eligibility rules.

What Can You Invest in With an IRA?

An IRA is not an investment by itself. It is an account that can hold investments.

Depending on your IRA provider, you may be able to invest in such assets as:

• Stocks

• Bonds

• Mutual funds

• ETFs

• CDs

The investments you choose can affect the level of investment risk within your IRA and the possible return you may get. For example, stocks and stock funds may offer higher growth potential over time, but they can also be more volatile. Bonds and CDs may be more conservative, but they may also offer lower growth potential.

Benefits of an IRA

An IRA can offer a number of advantages when saving for retirement, such as:

Tax-Advantaged Retirement Savings

Depending on the type of IRA you have, you may receive tax benefits upfront when you make contributions or when you take qualified withdrawals in retirement.

Ability to Save Outside of Work

An individual can open an IRA outside of an employer-sponsored retirement plan. That can be helpful to those who don’t have access to a workplace plan or want to save even more for retirement.

Investment Choices

IRAs typically offer a wide range of investment choices, depending on the provider. This might include mutual funds, ETFs, stocks, bonds, CDs, and more.

Potential Compounding Over Time

Money invested in an IRA has the potential to compound over time. Known as compounding returns, this happens when investment earnings generate their own earnings.

Roth and Traditional IRA Tax Options

Traditional and Roth IRAs offer different tax treatments, as described above. This gives retirement savers the flexibility to choose the account type that may fit their current and expected future tax situation.

Catch-Up Contributions

People aged 50 and older can generally contribute additional funds to an IRA through catch-up contributions to help them save more for retirement.

IRA Rules and Potential Drawbacks

Along with their benefits, IRAs also come with rules, limitations, and possible disadvantages. These include:

Contribution Limits

IRA contribution limits are substantially lower than 401(k) contribution limits. If you want to save more for retirement, you may want to use an IRA along with an employer-sponsored plan, if possible.

Income and Deduction Limits

Roth IRA contributions are subject to income limits. Traditional IRA contributions don’t have income requirements, but the ability to deduct contributions may be limited by income, filing status, and workplace retirement plan coverage.

Early Withdrawal Rules

IRAs are designed to help people save for retirement. If you withdraw money before age 59 ½, you may owe taxes and a 10% penalty unless an exception applies. Roth IRA contributions can typically be withdrawn tax- and penalty-free at any time, but Roth earnings are subject to early withdrawal penalties and taxes.

Required Minimum Distributions

Traditional IRAs generally require an account owner to take RMDs beginning at age 73. Roth IRAs do not impose RMDs for the original account owner.

Investment Risk

All investments involve risk, including investments in an IRA. A person can lose money depending on how their IRA is invested and market performance.

Rollover and Conversion Complexity

Rollovers and Roth conversions can have tax consequences. If you’re moving money between accounts or converting pre-tax money to an after-tax Roth account, it may be helpful to consult a tax professional.

IRA vs. 401(k): What’s the Difference?

IRAs and 401(k)s are both designed to help individuals save for retirement, but one is a workplace plan and the other isn’t. They also function differently. Here is a side-by-side comparison of them.

	IRA	401(k)
Opened by	An individual	Employer-sponsored
Contribution limits	Lower annual limits	Significantly higher annual limits
Employer match	None	Employer match may be available
Investment options	Typically a broad range of options, depending on the provider	Generally limited to a smaller menu of plan options
Tax treatment	Traditional and Roth options with corresponding tax advantages are available	Traditional and Roth options may be available, depending on the plan
Good to know	Can supplement a workplace savings plan	May be worth prioritizing contributions to if an employer match is available

If your employer offers a 401(k) match, contributing at least enough to receive the full match is worth considering before funding an IRA. Beyond that, an IRA may offer additional flexibility and investment choices for retirement savers.

Which Type of IRA May Be Right for You?

The right IRA typically depends on your income, employment status, tax situation, and retirement goals. Here are some general guidelines to explore.

If you are …	Consider this type of IRA
Looking for a tax deduction now	Traditional IRA
Looking for tax-free withdrawals in retirement	Roth IRA
Self-employed or a small business owner	SEP IRA or SIMPLE IRA
Moving money from a previous employer’s plan	Rollover IRA
Opening an account for a minor with earned income	Custodial IRA
An IRA beneficiary	Inherited IRA

For many individual savers, the main choice is between a Roth IRA and a traditional IRA. A Roth IRA may make sense if you expect to be in a higher tax bracket in retirement and want tax-free qualified withdrawals then. A traditional IRA may make sense if you want a possible tax deduction now and expect to be in a lower tax bracket in retirement.

When Is the IRA Contribution Deadline?

IRA contributions for a tax year are generally due by the federal tax filing deadline the following year. For example, 2025 IRA contributions were generally due by April 15, 2026. Contributions for 2026 are generally due by April 15, 2027.

This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.

How to Open an IRA

Opening an IRA is fairly simple and straightforward. Here are the six basic steps involved.

1. Choose the Type of IRA

Decide whether a traditional IRA, Roth IRA, or another type best fits your situation.

2. Choose an IRA Provider

You can open an IRA through a brokerage, bank, online bank, or other financial institution. Compare fees, investment choices, account minimums, digital tools, and customer support options.

3. Complete the Application

You’ll typically need to provide personal information, such as your name, address, date of birth, Social Security number or taxpayer identification number (TIN), and employment information.

4. Fund the Account

You can fund an IRA with contributions or a rollover from an eligible retirement account, for example. Contribution and rollover rules differ, so make sure you understand which type of funding applies. Also, pay close attention to contribution limits to make sure you don’t exceed them.

5. Choose Investments

Once money is in the account, you can select investments. Your options typically depend on the provider and the type of IRA you opened.

6. Consider Recurring Contributions

You don’t have to make the full annual IRA contribution limit all at once. Setting up recurring automatic contributions can help make saving for retirement easier and more consistent.

IRA Withdrawal Rules to Know

IRA withdrawal rules vary by account type.

With a Roth IRA, contributions can generally be withdrawn tax- and penalty-free at any time. However, to withdraw earnings tax-free, the withdrawal typically must be qualified (the Roth IRA must have been open for at least five years and you are aged 59 ½ or older). Withdrawals taken early are subject to taxes and a 10% penalty.

With a traditional IRA, withdrawals in retirement are generally taxed as ordinary income. If you take money out of the account before age 59 ½, you may also be subject to a 10% early withdrawal penalty along with taxes.

SEP IRAS typically follow traditional IRA withdrawal rules. So do SIMPLE IRAs, though there can be a higher penalty for certain withdrawals. Consult your plan documents or plan administrator to learn the specifics.

IRA withdrawal rules can be complex, so it may be worth speaking with a tax professional if you are considering an early withdrawal.

The Takeaway

An IRA is a tax-advantaged retirement account that can help individuals save and invest for the future. Traditional and Roth IRAs are the most common types of IRA for individuals to open, while SEP and SIMPLE IRAs are often used by self-employed people and small business owners. The right IRA depends on your circumstances, income, tax situation, retirement goals, and whether you’d like a potential tax break now or tax-free qualified withdrawals in retirement.

Before opening an IRA, review the contribution limits, earned-income requirements, investment options, withdrawal rules, and potential tax consequences.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

Help build your nest egg with a SoFi IRA.

FAQ

What does IRA stand for?

IRA stands for “individual retirement account” or “individual retirement arrangement.” Most people refer to it as an individual retirement account.

Is an IRA an investment or an account?

An IRA is an account that can hold investments. Depending on the IRA provider, investments may include stocks, bonds, mutual funds, ETFs, CDs, and more.

Can you lose money in an IRA?

Yes. Investing always involves risk. Investments within an IRA can rise or fall in value, so you can lose money depending on how the account is invested.

How much money do you need to start an IRA?

Some IRA providers have no minimum amount required to open an IRA, while others may require a small minimum deposit. You do not have to contribute the full annual contribution limit at once.

Can I have both an IRA and a 401(k)?

Yes, you can have both a Roth IRA and a 401(k) as long as you meet the Roth IRA eligibility requirements. IRA contribution limits are separate from contribution limits to 401(k)s.

Is a Roth IRA or traditional IRA better?

It depends on your specific situation. A Roth IRA may make sense if you expect to be in a higher tax bracket in retirement. With a Roth, you make contributions with after-tax dollars and withdraw the money tax-free in retirement. A traditional IRA may make sense if you expect to be in a lower tax bracket in retirement because you’ll pay taxes on withdrawals then. You can take deductions on your traditional IRA contributions upfront, which could help lower your taxable income for the year.

Can I borrow from an IRA?

No, you cannot borrow from an IRA. IRAs do not allow loans. However, if you have a Roth IRA, you can typically withdraw your contributions tax- and penalty-free. Another option to consider: There are also tax- and penalty-free withdrawals allowed from traditional and Roth IRAs in certain situations, such as for a first home purchase up to a specific limit.

When can I withdraw money from an IRA?

Penalty- and tax-free withdrawals from an IRA generally begin at age 59 ½, though exceptions may apply. With a Roth IRA, contributions can typically be withdrawn any time without taxes or penalties, but earnings are subject to early withdrawal taxes and penalties.

What is the IRA contribution limit for 2026?

For 2026, the IRA contribution limit is $7,500, or $8,600 if you’re aged 50 or older.

What is the IRA contribution limit for 2025?

For 2025, the IRA contribution limit is $7,000, or $8,000 if you’re aged 50 or older.

Can I open an IRA if I’m self-employed?

Yes. Along with traditional and Roth IRAs, those who are self-employed can also open IRAs specifically designed for the self-employed, such as SEP IRAs and SIMPLE IRAs.

Do IRAs have required minimum distributions?

Traditional IRAs generally have required minimum distributions (RMDs) beginning at age 73. Roth IRAs do not have RMDs for the original account owner.

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

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