How to Set Up a Health Savings Account

How Do I Start a Health Savings Account?

A Health Savings Account (HSA) can be set up in three simple steps, and once it’s up and running, it can help you bridge the gap between what your health insurance covers and your actual costs, among other benefits.

Let’s face it: Many of us these days select a High Deductible Health Plan, or HDHP, when it comes to health insurance. That means you may be paying a lower monthly premium in exchange for a high deductible. You could potentially get hit with a lot of unforeseen healthcare expenses before your benefits kick in. And even after you meet that deductible, you may have charges that are not reimbursed. A Health Savings Account (HSA) can help you set money aside to fill that gap.

Setting up an HSA may sound intimidating, as if you’ll have to fill out reams of paperwork, but that’s not at all the case! Whether through an employer or on your own, once you’re ready to start saving, the steps to opening an HSA account can be as simple as filling out an online form with basic information — easy peasy.

Let SoFi coach you through the steps and a few important considerations before you take the leap.

What Is a Health Savings Account (HSA)?

The HSA will be turning 20 soon: In 2003, Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act which created the Health Savings Account. These accounts were meant to help people with high deductible health plans set aside money to pay for out-of-pocket medical expenses: copays, dental care, eyeglasses, prescriptions, psychiatric help, and more. This can happen both before and after you reach your deductible.

In addition to covering health costs, these tax-free accounts can lower your amount of federal income tax owed. What’s more, HSAs can help with saving for retirement and unforeseen emergencies.

How Does an HSA Work?

A Health Savings Account can work just like a checking account. You can make deposits (or contributions), pay bills online, make transfers, and even pay for qualified medical expenses with an HSA debit card. You are free to withdraw HSA funds at any time to pay for health costs not covered by your high deductible health plan. One big note: Once you enroll in Medicare, you can no longer contribute to an HSA.

Deposits can also be contributed by your employer, with direct deposits made into your HSA straight from payroll. A nice aspect of these plans: Health Savings Account contributions rollover every year, so you don’t have to race to spend the pre-tax funds in your account. If you stay healthy, you can build up your emergency fund as well as your retirement nest egg. Your good health can lead to wealth down the line!

Who Can Open an HSA?

According to Federal Guidelines, you qualify to open a Health Savings Account if you:

•   Are covered under a high deductible health plan, or HDHP.

•   Are not covered by any other health plan, including a spouse’s.

•   Are not claimed as a dependent on someone else’s tax return.

•   Are not enrolled in a disqualifying alternate medical savings account, such as an FSA (Flexible Spending Account) or an MSA (a Medicare medical savings account).

•   Are not currently enrolled in Medicare.

How to Set Up a Health Savings Account

Once you’ve established that the pros outweigh the cons, you’re ready to tackle the final question: “How do I set up a Health Savings Account (HSA)?” Fortunately, the answer is pretty straightforward:

Step 1: Research Your HSA Options

If an HSA plan is offered directly through your employer, go to Step Two.
If you’re self-employed, investigate HSA options online, or reach out to banks or other financial entities.

Step 2: Fill Out the Necessary Paperwork

The set-up for an HSA is not unlike opening a bank account. You’ll be provided with paperwork or an online form, where you’ll give basic information such as your Social Security Number and proof of your identity (typically verified by a government-issued photo ID).

Step 3: Complete Verification

Be prepared to offer verification of your high deductible health plan (HDHP).

That’s it! It’s a quick and simple process to set up a Health Savings Account.

Once your HSA is up and running, you may be able to opt for automatic regular deposits from your bank account or straight from your paycheck. There is no minimum amount required to open an HSA, but you’ll need at least $1,000 in the account in order to invest in certain mutual funds.

HSA Contribution Limits

For 2022, Health Savings Account (HSA) contribution limits are $3,650/year for individuals and $7,300 for families. There is never a minimum requirement for deposits. Some ground rules to be aware of:

•  You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.

•  You have no supplemental health coverage except what is permitted under other health coverage.

•  You aren’t enrolled in Medicare.

•  You can’t be claimed as a dependent on someone else’s tax return.

Advantages of an HSA

There are many benefits to opening an HSA. Sure, it can provide a cushion or safety net when it comes to out-of-pocket medical costs. But there are other perks beyond covering the price of a new pair of glasses.

Covering Expenses for You and Your Family

From ambulances to acupuncture, a Health Savings Account can cover the costs your HDHP doesn’t. The IRS has an extensive liston how you can use your HSA funds. One example: Did you know you can also use your Health Savings Account to pay for medical expenses for a spouse or a child—anyone who is part of your tax household—even if they aren’t on your HDHP? It’s true!

Lowering Taxable Income

Here’s another bonus to having this kind of account: Your HSA contributions are made before taxes are deducted, thereby lowering your taxable income. As a result, you may pay less in taxes.

Rollover Contributions

There’s no “use-it-or-lose it” pressure when you have a Health Savings Account. Unused HSA funds don’t disappear at the end of the year. You can roll them over again and again, accumulating tax-free interest. Those earnings can turn into savings to be invested in the future or used for life’s little surprises—a chipped tooth, say.

Saving for Retirement

At age 65, you can start using the funds in your Health Savings Account for anything, without penalty.
Withdrawals will be taxed the same as they would from a 401(k) or IRA, but any funds waiting for use will avoid taxes while earning interest.

Additionally, if you are lucky enough to be able to max out your annual IRA and/or 401(k) contributions, an HSA is another way to save more tax-free money toward retirement. Beyond covering copays, an HSA is a great way to get your money working for you.

Disadvantages of an HSA

Okay, now you know the upside of opening an HSA. But there are potential downsides that are worth knowing about and considering before you sign up.

Penalties for Unqualified Expenses

Until you turn 65, HSA funds cannot be used for anything but eligible medical expenses. To do so would subject withdrawals to income taxes and a 20% penalty.

Monthly Fees

Health Saving Account providers may charge a monthly fee. These fees generally tend to be lower than $5 bucks per month, but they do add up. While there are providers out there that don’t charge account management fees, all will assess an investment fee. Do your homework to find the vehicle with the lowest fees.

Potential Losses

Like an IRA or 401(k), any invested money in an HSA can mean monetary gains and losses. As with any investment account, you need to be prepared for your HSA balance to dip if the market trends downward.

Keeping Tabs for Your Tax Records

HSA contributions and expenditures must be reported on your tax return. It may not be a deal-breaker, but for some people, keeping records of your HSA activity can be a nuisance.

HSA Advantages vs. Disadvantages

Pros Cons

•   Covers an extensive list of out-of-pocket health expenses

•   Can be used for family members

•   Lowers taxable income and therefore may decrease your taxes

•   Contributions rollover to the next year

•   Promotes tax-free savings for retirement

•   Penalties for nonqualified expenses

•   Unexpected and potentially hidden fees

•   Account balance can fluctuate with the marketplace

•   Activity must be reported on your tax return

Things to Consider When Choosing an HSA

If your job offers a Health Saving Plans, great! They’ve done the research for you. Employers may also offer Flexible Spending Accounts. But unlike FSAs, which are owned by an employer and can be inflexible, a Health Savings Account has higher contribution limits and is controlled by you.

If you are self-employed, do your research. You’ll find an array of Health Savings Plans to choose among; HSA comparison websites can help you navigate the search. Remember to pay attention to any monthly/annual fees so you know exactly what to expect. Ideally, you’ll want an HSA that makes it easy to manage your account online. Many banks and credit unions offer HSAs, so check with your financial institution.

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning 1.25% APY on your cash!


The Takeaway

Once you’ve made the decision to enroll in a Health Savings Account, the steps to set it up are relatively painless. You can start using your HSA fund right away to help cover qualified health-related costs, knowing that contributions are made with pre-tax dollars, don’t need to be used up by the end of the year, and can even in some situations help boost your retirement fund. A Health Savings Account goes beyond just covering your healthcare expenses and can serve as one of the best tax-advantaged savings vehicles available. It can enhance your sense of security and keep your wealth growing.

Looking for other ways to grow your wealth? Why not consider opening an online bank account SoFi? We’ll give you a few very good reasons why this is a smart move. With our SoFi Checking and Savings, set up direct deposit, and you’ll enjoy a super competitive 1.25% APY, which is over 41 times the current average checking account rate. Plus, we don’t nickel and dime you with fees. We charge no monthly or minimum balance fees, and with monthly direct deposits of at least $1,000, we’ll even cover you for $50 in overdrafts without a fee.

Come see how much better banking can be with SoFi.

FAQ

How do I set up an HSA account?

With a valid government-issued photo ID, Social Security number, and proof of your HDHP, you can fill out a basic paper or online HSA form, provided by an employer or financial institution.

Can I start an HSA on my own?

Yes. As long as you are enrolled in an HDHP and not covered under someone else’s policy, you can start an HSA.

How much does it cost to open an HSA?

The initial sign-up is free, and there is no minimum deposit amount to start. But expect investment fees and possibly monthly management fees.


Photo credit: iStock/AndreyPopov

SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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.
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.
SOBK0222012

Read more
5 Cash Management Strategies for You

5 Cash Management Strategies You Should Know

Cash management is a term often used by businesses to determine how much revenue coming in is available for day-to-day operations, and how much is available for investing in the future of the business.

But cash management is important for individuals, too. Your own personal balance sheet is not unlike that of a business. You want to determine how much of your income is available for covering expenses, discretionary spending, and investing for your future.

When you take control of your spending and saving in proportion to your income, you’re engaging in cash management. Here, we’ll explain the process in more depth, highlight the benefits you’ll reap, and guide you through this process, step by step.

What Is Cash Management?

You may wonder about the meaning of cash management; it can sound like a complicated term. But here’s the simple truth: Cash management is all about managing the money that’s coming in and the money that goes out in the best way possible for your day-to-day living. You can also think of it as cash planning, as it helps you stay in good financial shape today and tomorrow. Let’s look at this through a somewhat different lens: Solid money management strategies like the ones we’ll explore help you maintain healthy cash balances, stay on budget, earn a return on your savings, and reduce expensive debt.

💡 Recommended: Business Cash Management, Explained

Why Is Cash Management Important?

Good cash management is essential for a business’s financial stability. By the same token, borrowing cash management techniques that businesses use can help individuals enhance their overall financial wellness.

Cash Management Strategies

The concept of cash management is straightforward, but implementing it can become a bit more complex as individuals deal with financial ups and downs. These five strategies can help you adopt an efficient cash management process worthy of any corporate Chief Financial Officer.

1. Create a Realistic Budget

Think of your budget like a personal cash flow statement, which is a financial statement businesses often use to monitor income and expenses each month. Your personal budget can work the same way, becoming your personal cash flow statement.

If you’re often wondering at the end of the month where all your money went, that’s likely a sign it’s time to create a realistic budget. This can give you a clear picture of your monthly cash flow (money you earn) and your monthly cash outflow (money you spend).

From there, you can take the necessary steps to manage your cash flow to help you avoid too much debt, set financial goals, and save for the future. Once you accomplish that, you’ll be enjoying a good example of cash management. And it’s easier than you might think! Creating a budget isn’t difficult. You’ll simply need to gather some of your financial information and do some calculating. Let’s explore what financial info you’ll need below.

Income

Income includes your salary, bonuses, self-employed income, rental income, and all investment income including interest, dividends, and returns.

For the purposes of cash flow budgeting, you want to work with after-tax income, or the money that’s actually available to you instead of pretax gross numbers. So, this means take-home pay, not your gross salary.

Any extra money — such as bonuses, tax returns, or money from side gigs — should be factored in, as they are earned and with taxes owed in mind.

Expenses

Essential expenses should include things like the following:

•   Housing and utilities

•   Food

•   Childcare

•   Medical expenses

•   Insurance premiums

•   Car payments and maintenance

•   Public transportation costs

•   Clothing

Expenses can also include discretionary spending. This includes the things you want but don’t necessarily need, such as entertainment, travel, and other non-essential items.

Then there’s debt. Do you have student loans, credit card debt, or any other debt? If so, this is the liability side of your cash flow statement. You’ll need to take a close look at that.

2. Accurately Estimate Costs

Just like a business, the more accurate your budget is, the more efficient your finances will be.This is where tracking expenses comes in. You may find it makes sense to track your expenses for one to three months so you can determine exactly where your money is going. You can do this using your own spreadsheet or budgeting apps such as SoFi Relay.

Here are a few common living expenses that can help you create your own list. Once you have a finalized list, you can then use it to determine how much you’re spending on living expenses.

•  Housing

◦  Rent

◦  Mortgage

◦  Utilities

◦  Maintenance

◦  Insurance

•  Transportation

◦  Car payments

◦  Maintenance

◦  Gas and tolls

◦  Parking

◦  Public transportation costs

◦  Taxis and ride shares

◦  Auto insurance

•  Childcare

◦  Day care

◦  After-school programs

◦  Summer camp

◦  Tuition

◦  Babysitting

◦  College tuition

•  Insurance

◦  Health insurance premiums (if not deducted from your paycheck)

◦  Auto and home insurance premiums

◦  Life insurance premiums

◦  Disability income insurance premiums

•  Food

◦  Groceries

◦  Takeout and restaurants

•  Health

◦  Deductibles, copays, and coinsurance

◦  Prescription drug costs

◦  Over-the-counter (OTC) drugs

◦  Eyeglasses and contacts

•  Entertainment

◦  Concert, theater, and movie tickets

◦  Paid streaming and podcast services

◦  Books

◦  Travel

•  Pets

◦  Food

◦  Flea and tick prevention/other medications

◦  Vet bills

◦  Pet insurance

•  Personal

◦  Clothing/shoes/accessories

◦  Haircare and other grooming

◦  Toiletries/cosmetics

◦  Gym membership

3. Be Mindful of Cash Flow

You can use your income and spending data to better manage your cash flow. One approach to consider: Separating your income into different “buckets” using a percentage system.

With the 70-20-10 rule, you aim to put 70% of your income into essential and discretionary spending, 20% toward savings or paying off debt, and 10% toward investing and charitable giving.

These “buckets” can help you prioritize and achieve your financial goals. If your spending exceeds 70% of your income, you can find ways to reduce discretionary spending. How, exactly? Cutting back on takeout and restaurant meals, streaming services, and clothing purchases can all add up to more savings.

You may also find you need to make more drastic cost-cutting moves, such as finding less expensive housing or transportation. This can be especially important if you are paying off debt. If you are carrying heavy student loans and/or credit card debt, you may find you need to devote even more than 20% of your income to paying that down so you can avoid the high-interest payments and make way for other savings. This could include an emergency fund or health savings account (HSA).

The 10% investing allocation is where you focus on long-term financial goals, such as saving for retirement or future education expenses. It also offers a place to give back with charitable contributions.

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning 1.25% APY on your cash!


4. Invest Extra Cash

Successful companies invest extra cash back into the business so it can grow. The same notion works for personal finances. Where you invest your extra cash that’s destined for short- and long-term savings is an important aspect of cash management.

For short-term savings, high-yield savings accounts, money market funds, certificates of deposit (CDs), and cash management accounts may all pay more interest than a traditional savings account.

Funds earmarked for long-term savings are usually best made as contributions to the following kinds of accounts:

•   IRAs

•   401(k)s

•   403(b)s

•   Self-employed retirement savings plans

•   Other long-term tax-advantaged accounts

This isn’t money you need soon, so it can be invested more aggressively than your short-term savings.

5. Avoid Bookkeeping Inaccuracies

With any cash management or budgeting process, being fluid and staying on top of your finances is key. There are times when you may need to allocate more toward debt payment and other expenditures, as well as times when you can focus on saving.

Regularly tracking expenses and adjusting your buckets accordingly will help ensure no inaccuracies creep in and keep you on track for your financial goals. Also, regularly checking your account balances and reviewing statements (online, in an app, or on a hard copy) is vital too. Accurate bookkeeping enables you to stay on top of cash management while balancing short-term needs with long-term financial planning.

The Takeaway

As you’ve seen from these examples of cash management, it’s a process that need not be complicated. By adopting these cash management concepts, you’ll be able to manage your cash flow, create a budget, and stay on top of your finances. What’s more, they’ll also guide you towards meeting your long-term goals as well by helping you manage debt and save for tomorrow.

Bank Better with SoFi

Cash management strategies work as well for individuals as they do for businesses. But it can help a person along to have a partner in growing your money. A SoFi Checking and Savings bank account can be just that. We offer eligible accounts a super-competitive 1.25% APY, plus we don’t charge you minimum balance or monthly fees. What’s more, you’ll have access to a network of 55,000 fee-free ATMs. All of this means you’ll have more money to manage!

See how good banking can be with SoFi Checking and Savings.


Photo credit: iStock/ptasha

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
SoFi’s Relay tool offers users the ability to connect both in-house accounts and external accounts using Plaid, Inc’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data.
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.
SOMN1121074

Read more
Business vs Personal Checking Account: What's the Difference?

Business vs Personal Checking Account: What’s the Difference?

They say you should never mix business with pleasure — and that applies to bank accounts, too. If you’re a freelancer, small business owner, or entrepreneur, chances are opening a business checking account could be a good move for you.

While both business and personal checking accounts allow you to safely store money and utilize those funds to pay bills and expenses, there are some important differences that make a business checking account a good idea for most folks who work for themselves. In fact, depending on the structure of your business, you may be legally obligated to open a business bank account — which is a pretty compelling argument to do so, we’d say.

Let’s take a closer look at how a business checking account differs from a personal checking account. We’ll cover:

•   What is a business checking account and how it works

•   What is a personal checking account and how it works

•   What are the key differences between a business vs. a checking account

•   Which one (or both) is right for you

What Is a Business Checking Account?

A business checking account is a checking account specifically designed for business owners. As such, they often include business-specific features, such as payroll or bookkeeping integrations, the ability to assign debit cards to employees, or simplified credit card payment processing.

In many other ways, however, a business checking account is a lot like the personal checking account you likely already have. It’s a (relatively) safe place to stash cash and use it for regular, day-to-day expenses by way of writing checks, using a debit card or initiating transfers. For example, it can allow you to:

•   Pay suppliers

•   Deposit payments from customers

•   Pay employees

But it’s only to be used for business-related expenses!

How Does a Business Checking Account Work?

When thinking about a business checking account vs. a personal account, you’ll find many similarities. You open the account, fund it with some money, and, hopefully, go on to deposit more cash as profits from your business roll in.

You’ll likely have access to the account via a debit card and/or a checkbook, and will likely also be able to log into the account and manage it online. (Both digital-first and brick-and-mortar banks offer business bank accounts these days, and most feature some kind of virtual account management option.) Business banking products often bundle both a checking and savings account, so you can start creating a cushion for a rainy day.

However, as mentioned above, a business bank account may come with some additional, business-specific features. It may also come with higher fees and minimum account balance requirements than a personal checking account, not to mention requiring documentation to prove you do, in fact, have a business.

What Is a Personal Checking Account?

A personal checking account is, well, a checking account used for personal expenses. Just like a business checking account, it’s a place where you can stash your cash with relatively few worries and use it to pay bills and expenses using a debit card, checkbook, or transfer services. Many banks also make it easy to bundle a personal checking account with a personal savings account, which is a great place to stash your emergency fund.

Unlike business checking accounts, though, a personal account won’t include those fancy features we were talking about. On the bright side, though, it’s very possible to find free personal checking accounts, which can help you save cash on those pesky monthly maintenance fees.

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning 1.25% APY on your cash!


What Are Personal Checking Accounts Used For?

Personal checking accounts are commonly used for:

•   Storing money earned through employment or other income streams

•   Paying bills using transfer services or paper checks

•   Making transfers to friends, family, and businesses

•   Making point-of-sale purchases using a debit card

As their name suggests, personal checking accounts are designed to help you manage personal expenses and attend to your everyday money needs. Typically, a personal checking account is the hub of someone’s daily financial life.

What’s the Difference Between Business and Personal Checking?

Let’s recap what we’ve learned about the difference between business and personal checking accounts.

Business Checking Accounts

Personal Checking Accounts

A place to safely store money and access it for regular business expenses A place to safely store money and access it for day-to-day personal expenses
May come with additional business-friendly features, such as payroll and bookkeeping integration Designed for personal use; may offer person-to-person transfers and other useful features
May come with a bundled business savings account May come with a bundled personal savings account
Often come with minimum opening deposit or minimum monthly balance requirements and fees; you’ll need to offer documentation proving you have a business Many personal checking accounts are available for free
Helps entrepreneurs separate out their business expenses for ease of accounting and remaining compliant with regulations Makes paying bills and other regular expenses more manageable, regardless of your source of income

Are Business Checking Accounts FDIC Insured?

Any business checking account worth its salt should be FDIC insured — or NCUA insured, if it’s opened and held at a credit union. The FDIC is a government agency that protects deposit accounts, such as checking accounts, and reimburses lost funds up to the $250,000 standard insurance amount in the event your bank fails. (The NCUA is a similar agency, but specifically geared toward credit unions.)

The FDIC and NCUA insure business and personal accounts alike, but it’s always important to double-check and make sure the bank or financial institution you’re hoping to open an account with explicitly states that deposits are insured.

When Does Someone Need a Business Checking Account?

If you’re a small business owner — or even a freelancer — a business checking account might be a good idea, even if it’s not technically required. Keeping your business and personal expenses separate can help make accounting easier, simplify your tax reporting process, and help make your business look more legitimate to the IRS.

In addition, if you’re incorporating (i.e, operating as LLC, S corp, or other type of business entity), separating your business expenses from your personal expenses can help protect your assets in the event you get sued. Even if it’s not legally required, many accountants and law professionals recommend their clients open a business bank account for this reason.

A business bank account can help you:

•   Separate your business and personal expenses, which can both protect your assets and make bookkeeping easier

•   Help make your tax reporting easier, as all of your deductible expenses will be in one place

•   Make it easier to see you business’s cash flow and make adjustments to your business model as needed, or valuate the business for other purposes

•   Make your business look more legitimate to both the IRS and potential customers, vendors, and other parties you interact with professionally

Establish a relationship with a bank that could allow you to more easily take out a business loan or business line of credit in the future.

Can I Use the Same Bank for Personal and Business Banking?

In many cases, you technically can use your personal checking account for business banking… but doing so is generally considered ill-advised by experts for the reasons listed above. Just for starters, it makes separating out your expenses a lot harder — and you’ll definitely want to have a handle on those so you can get any deductions coming your way.

Case in point, the IRS explicitly recommends keeping separate business and personal bank accounts for record-keeping purposes. It’s easy to let it go by the wayside if you’re just starting up as a small business owner or entrepreneur, but consider whatever expenses the account incurs as part of your business start-up costs. It’s worth it in the long run!

What’s more, it’s a wise move to separate your business and personal accounts in the event that you ever get audited. Combined accounts can lead to a very challenging situation if you ever need to prove your business vs. personal cash flow, expenses, and other aspects of your banking life.

Choosing the Right Business Checking Account

When you are shopping for a business checking account, there are a few features that should be considered to help ensure that you find the right match. These include:

•   Fees. Many business accounts have fees associated with them, and if you are able to get them waivered, the financial requirements (say, the amount you have held in the account) tend to be higher than for personal accounts.

•   Cash deposit limits. Your bank may set a limit in terms of the amount of money you can put in the account per billing cycle. If you hit that amount, you may accrue a cash-handling fee.

•   Transaction limits. Your business checking account may have a limit on the number of transactions they will handle for free per billing cycle. Go over that amount, and you may be charged.

•   Interest. There are business accounts that offer interest on your balance. Do the math though to see if this should be a deciding factor in your choice of a bank. If fees are higher at the bank offering interest, you might wind up losing money in the long run.

•   Bundled services. Your bank might offer some free features, like a business credit card or merchant services along with your checking account.

Depending on the nature of your business and how you handle your banking, some of these factors may matter more than others. Find the bank that gives you the most features and perks you are seeking with the lowest fees possible.

The Takeaway

If you own your own business or earn freelance income, keeping your business expenses separate from your personal expenses can help simplify your life in many ways. A business bank account will help keep these finances separate, streamlining accounting and tax preparation, and protect you if you were ever faced business liability.

But let’s not forget that keeping your personal banking in tip-top shape is vital, too. That’s where the SoFi Checking and Savings bank account can help. When you sign up with direct deposit, you’ll get both checking and savings with absolutely zero account fees and earn 1.25% APY just for letting us hold onto your funds. For comparison, that’s 41 times the national average checking rate!

See how much better you can bank with SoFi.

FAQ

What documents are required to open a business checking account?

In order to open a business checking account, you’ll need your regular, basic documents — like your government-issued picture ID — as well as business-specific documents such as your EIN and business license. Check with the bank you’re considering directly for full details on which documents are required.

Can I open a business checking account without an LLC?

It depends on the financial institution, but yes, business accounts are available that don’t require the business owner to be incorporated in any way.

Can I use a personal checking account for business?

You can — the question is whether or not you should. Separating your business and personal expenses can make your life, or your accountant’s life, a lot easier when it comes time to assess your business finances or pay taxes. In addition, there are special business banking features you might get if you opt for a business-specific account.


SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Photo credit: iStock/mapodile
SOBK0222030

Read more
What Is a Tax-Free Savings Account?

What Is a Tax-Free Savings Account?

A Tax-Free Savings Account (TFSA) is a tax-advantaged account offered in Canada that allows the account holder to avoid taxes on any interest earnings, capital gains, or dividends earned on contributions held within the account.

These accounts are available to Canadians ages 18 and older with valid Social Insurance numbers (SIN). They can be opened at almost any major financial institution across Canada.

Despite the name, Tax-Free Savings Account contributions don’t exclusively have to be held in cash. Depending on the type of TFSA you have, you may be able to choose from a variety of mutual funds, guaranteed investment accounts, government bonds, and even publicly traded stocks.

Let’s learn more about these savings vehicles by reviewing their details, their pros and cons, and how contributions and withdrawals are made.

What Is a TFSA?

TFSAs, or Tax-Free Savings Accounts, are excellent tax-sheltered accounts that allow contributed funds to grow-tax free. That means no taxes on interest earnings, dividends, or capital gains. What’s more, funds can be withdrawn at any time without penalty for account holders. This is a key difference between TFSAs and retirement savings plans, which are designed to be held till a certain age.

If you compare TFSAs to Registered Retirement Savings Plans (RRSPs), you’ll see that TFSAs allow you to withdraw your contributions and any subsequent earnings over time, tax-free. With RRSPs, a certain percentage of any withdrawals taken out prior to retirement may be withheld.

To look at this from a different angle, any funds contributed into a TFSA can be withdrawn on demand and are not subject to taxation or penalty, as long as all contributions remain beneath your overall TFSA contribution limit. This makes them an excellent tax shelter for both short-term and long-term financing needs.

We’ll run through how these accounts work, their benefits, limitations, and everything else you need to know about TFSAs.

How Do TFSA Contributions Work?

Tax-Free Savings Accounts allow you to contribute a finite amount, set annually by the Canada Revenue Authority (CRA). As mentioned above, your funds within the TFSA can earn interest, earn dividends and even capital gains without being taxed. The 2022 contribution limit for TFSAs is $6,000. This makes them excellent financial vehicles when it comes to the important goal of saving for the future.

TFSA limits accumulate and carry over every year. This means that your contribution limits (commonly referred to as your “contribution room”) will stack up annually. This holds true whether or not you’ve completed a Canadian income tax return or even have an existing account at the time. In other words, if this year’s contribution limit is $6,000 and you only contribute $4,000, next year you can save an extra $2,000 over the limit to catch up. So if the limit for the following year was $6,000, your contribution room will be $8,000 (adding the $6,000 and the additional $2,000).

In fact, you’re allowed to make retroactive contributions for all of the cumulative annual contribution limits dating back to 2009, or when you first turned 18, whichever was more recent.

Make sure you keep track of your overall contributions, as accidentally overcontributing to the account can result in tax penalties. According to the CRA, overcontributions are subject to a 1% penalty tax on the overcontribution amount each month until it’s withdrawn from the account.

To contribute to a TFSA, you’ll want to first figure out what your current annual contribution limit is and then calculate how much additional contribution room you have from years past where you didn’t hit the limit. By the way, there’s no earned income requirement for contributing to a TFSA.

To help you calculate your total TFSA contribution limit, we’ve provided a table below that outlines all of the annual contribution limits since the program was established in 2009. We’re also sharing a cumulative contribution limit to help you back-date your permitted total contribution amount.

Year

Annual Limit

Total Accumulated Limit

2009 $5,000 $5,000
2010 $5,000 $10,000
2011 $5,000 $15,000
2012 $5,000 $20,000
2013 $5,500 $25,500
2014 $5,500 $31,000
2015 $10,000 $41,000
2016 $5,500 $46,500
2017 $5,500 $52,000
2018 $5,500 $57,500
2019 $6,000 $63,500
2020 $6,000 $69,500
2021 $6,000 $75,500
2022 $6,000 $81,500

If you turned 18 in 2009 or prior and have just begun making contributions this year, your total permitted lifetime contribution limit is $81,500. If you turned 18 after 2009, your contribution room (or limit) will be the sum of the cumulative amounts for all years starting from when you first turned 18.

How to Withdraw Money From a TFSA

When thinking about different types of savings accounts, you may wonder how a TFSA stacks up in terms of how you can withdraw funds. Let’s explain: You can withdraw both contributions and earnings from your TFSA at any time, without fear of tax penalty. Withdrawals are only logged when you transfer or take savings out of your TFSA, so if you convert your investments into cash and the money remains in your account, this won’t be counted as a withdrawal.

You can withdraw any amount up to the entire balance of your TFSA account (though obviously, you’d like to avoid overdrafting a savings account). One of the best aspects of TFSA withdrawals is that the amount of any withdrawn contributions is automatically added back to your total TFSA contribution room for the following tax year.

However, if you reach your contribution limit in a given year, you won’t be able to make any additional contributions during that year, even if you decide to withdraw funds from the account. Contribution rooms are only recalculated after the beginning of the following year.

Withdrawals can typically be done easily online; check with your account holder for details.

Pros of a TFSA

We’ve highlighted some of the advantages of a TFSA, but let’s run through the main ones here:

•   Tax-exempt interest and investment earnings: TFSAs are excellent places to park excess savings to earn a higher rate of return without having to worry about taxes on interest and capital gains. These tax advantages can be a bonus over the way savings accounts typically work.

•   Withdrawal and use flexibility: Unlike RRSPs which may incur a penalty when withdrawn prior to retirement, TFSAs have no restriction on the use of the underlying funds.

•   Contribution limits rise annually and do not expire: This means that you won’t miss out on any opportunities to add to your TFSA, even if you don’t have any income to add to your account in the current year.

•   Wide range of permitted investments: Unlike what the name suggests, funds deposited in a TFSA can be invested in stocks, bonds, mutual funds and other investments as permitted by the issuing institution.(Remember, though, that these investments may not be insured.)

Cons of a TFSA

Yes, there are some downsides to be aware of with TFSAs. Consider these three points:

•   Non-deductible contributions: All contributions to TFSAs are made on an after-tax basis. As a result, TFSA contributions can’t be used to reduce your taxable income.

•   Day-trading is not permitted: The CRA discourages day-trading in your TFSA account. Depending on the frequency and type of trading activities within your account, it may declare your investment returns to be taxable business income if you’ve failed to follow the rules.

•   Not bankruptcy-remote: Unlike RRSPs which are protected from creditors, TFSAs are subject to the whims of any creditors that may seek to pull your assets back in court. This means that the funds in TFSA are fair game in bankruptcies.

Typical Steps for Opening a TFSA

You can open a TFSA at most major financial institutions in Canada. They’re available at banks, credit unions, and even insurance companies. Some offerings may differ slightly in terms of their permitted investments, so it pays to shop around for the one that best suits your financial goals. Here are the five typical steps to opening a TFSA:

1.    Shop around for a financial institution that offers TFSAs; make sure it fits your needs and investing style. The following are the types of TFSA accounts available:

a.    Deposit

b.    Annuity

c.    Trust arrangement

d.    Self-directed TFSA

2.    Once you’ve decided on the right TFSA, contact your chosen institution directly and apply for an account.

3.    As part of the application process, the institution (issuer) will ask for some personal information. Make sure to have the following items available:

a.    Birthdate

b.    Social Insurance number

c.    Government-issued ID

4.    After you’ve provided all the necessary documentation and are approved, your issuer will register the account as a qualifying arrangement with the CRA.

5.    You can then set up funds transfers or direct deposits into your TFSA account whenever you’re ready.

Congratulations, you now have a newly formed TFSA!

Keep in mind that while there’s no restrictions on the number of Tax-Free Savings Accounts you can have, your total contribution limit will be shared across all your accounts. Additional TFSAs will not increase your total contribution room.

All contributions will be reported to the CRA by your issuing institution, so remember to keep track of your contributions to avoid running afoul of the tax rules.

The Takeaway

Anyone who can afford to should consider taking advantage of a Tax-Free Savings Account. TFSAs are versatile tax-advantaged accounts that can be used for both short-term and long-term savings needs. They provide an excellent tax-shelter for your investment earnings that can accumulate over time and be applied to a variety of needs. For those looking for a great savings vehicle, this could be it.

For those who are searching for a great day to day banking partner, we’ve got a great option, too. The SoFi Checking and Savings online bank account offers those who sign up with direct deposit a competitive 1.25% APY to help your money make more money. There are plenty of other perks, too, like no fees (no monthly or minimum balance ones, and we’ll even give you up to $50 overdraft coverage without a fee).

Come see the smart and seamless way to bank with SoFi.

FAQ

Can you lose money in a Tax-Free Savings Account?

Yes, depending on the underlying investments, there’s a possibility that you may lose the principal on your investment. When the principal is invested in securities like stocks, bonds and mutual funds, it is not covered by the Canada Deposit Insurance Corporation (CDIC). However, any uninvested cash in your TFSA is insured for up to $100,000 under the CDIC.

How do tax-free savings work?

Interest, capital gains, and dividends earned in a Tax-Free Savings Account aren’t taxed as long as you adhere to guidelines set by the CRA. As long as you remain beneath the contribution limits and don’t run afoul of any TFSA rules, earnings from your TFSA account won’t be treated as income.

Keep in mind, some exceptions, like dividends earned from U.S.-based equities may still be considered taxable income. You’ll want to thoroughly review and understand the investment guidelines set by the CRA when planning your portfolio.

Is a Tax-Free Savings Account worth it?

Depending on your particular situation and goals, it can indeed be worth it. Your interest, dividends, and your capital gains will grow tax-exempt, and you won’t pay taxes on any withdrawals.


SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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.

Photo credit: iStock/Vladimir Sukhachev
SOBK0322008

Read more
Is a Checking Account Good for Your Credit Score?

Is a Checking Account Good for Your Credit Score?

Even though checking accounts can be the heartbeat of your financial transactions, opening one of these accounts usually doesn’t help your credit score.

Note the use of the word “usually,” though. As time passes after you open your account, a well-maintained banking life can be a vital step towards building a positive financial history. On the other hand, it’s worth noting that there are times when a checking account can actually lower those three digits that determine your credit-worthiness.

So let’s equip you with the information you need to know about this important financial topic. We’ll take a closer look at why credit scores are important, how opening a checking account typically impacts — or doesn’t impact — your score, as well as the times when your checking account can lower (ouch) your score.

Does Having a Bank Account Affect Your Credit Score?

In general, bank accounts have little to no direct impact on building your credit score, as FICO scores only track the activity on your credit accounts. While your credit report may list the existence of any bank accounts you own, it will not track the balance of those accounts.

The important aspects of account ownership are that you keep your account positive and promptly pay off any overdrafts. If you can do that, you should be able to avoid any negative impact on your credit score.

Does Opening a Checking Account Affect Credit Score?

While opening a checking account often has virtually no impact on your credit score, there are exceptions. Most banks will check your credit score when you open a bank account with what is known as a “soft inquiry.” This means they aren’t doing a “hard inquiry” in which they would access and review your full credit report. These kinds of “hard pulls,” which tend to indicate you may be applying for more credit, can lower a person’s credit score. You can ask a bank in advance if they do a hard pull when you apply to open a checking account. If the answer is yes, you may decide to do your business elsewhere.

But let’s consider one important scenario in which a checking account might affect your credit score:

You Apply for Overdraft Protection

When you apply for overdraft protection, you are basically requesting a line of credit. If you dip into negative balance territory, you are asking the bank to shore you up. In order to assess if you are a good risk for this kind of loan, the bank will delve into your credit report. This situation can cause your credit score to dip.

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning 1.25% APY on your cash!


Situations When Your Credit Score May Be Impacted

Now that you know about opening a bank account and its impact on your credit score. But what about as you go about your business, doing those typical transactions in checking and savings accounts? Could that cause your credit score to go up or down?

Typically, these transactions are not recorded on your credit report. Certain issues, however, that relate to using your bank accounts do have the potential to impact your credit score if they’re not resolved in a timely manner. Let us give you a heads-up about these scenarios.

Bank Makes a Hard Inquiry

As previously mentioned, if you apply for overdraft protection or a similar line-of-credit service on your bank account, the bank may do a “hard inquiry” on your credit report. A single hard pull on your credit report typically won’t have a lasting impact on your credit score, however multiple hard pulls within a short period of time can drop your credit score by a few points.

Failing to Pay Overdraft Fees

If you fail to pay overdraft fees in a timely manner, they will show up as debt on your record. Sometimes fees may seem like “no big deal,” but they truly do matter. If you have unpaid overdraft fees, they can wind up on your credit report, just like any other unpaid debts. It’s not a good look and can lower your score.

Closing an Account With a Negative Balance

If you fail to pay off your negative balance before closing your bank account, your bank may send the account off to collections. This is likely to have a substantial negative impact on your credit score, as it’s a failure to pay your debts.

If you plan on closing any bank accounts, always make sure you also close out any outstanding balances in your account. Failure to do so will show up on your credit report as a collections event.

Overdrafts and Bounced Checks

Regular overdrafts on your accounts and continually writing bad checks won’t directly impact your credit score. That said, failure to repay the subsequent overdraft fees and bad check fees may result in those penalties being submitted to collections, which will negatively impact your credit score. For this reason, you should check your account balance regularly to ensure the amount isn’t tipping into negative territory. Mobile banking apps make that a quick and simple process.

Debit Card and ATM Abuse

Constantly using your debit card and withdrawing cash from ATMs without regard for your account balance can negatively impact your credit score if you overdraw your account. The failure to pay those overdraft fees can result in a collections event which can negatively impact your credit score.

Here’s another angle to consider: Debit card and cash transactions are not reported on your credit report. Over-reliance on your debit card will actually prevent you from building a proper credit history. While some of us may be averse to using credit cards for every transaction, they’re a solid tool for building up your credit score when used responsibly.

Suspected Fraud

Whether due to fraud or by mistake, unauthorized transactions that end up overdrawing your account can negatively impact your credit score. If someone opens a bank account in your name and conducts fraudulent activity, the consequences of those actions could become a black mark on your credit report.

It’s a good idea to monitor your bank accounts regularly for any signs of fraudulent activity. By federal law, everyone is entitled to one free credit report every year from annualcreditreport.com. You can download your credit report and check for any mistakes in your account before they become a problem. Notice unfamiliar or incorrect activity on your report? Let the credit reporting agencies know, as well as law enforcement if needed.

Why Credit Scores Are Important

Credit scores are a way to measure how well a person handles debt: Do they pay on time? Do they owe a small or steep amount of money? The scores are calculated by the three big credit reporting agencies, Equifax, Experian, and TransUnion. A credit score tops out at 850, with 720 and up being considered excellent.

Establishing good credit is important because your score will help lenders determine whether you’re creditworthy. This is most important when it comes to two things: Determining whether or not you get approved for a loan, and — if you are approved, setting the rates and terms on your loan.

Here’s a list some of the key benefits to a good credit score:

•   Lower rates on mortgages, credit cards, auto, and private student loans

•   Higher chance of approval on credit applications

•   Better insurance rates

•   Easier time getting approved for housing rentals

•   Higher borrowing limits on credit cards and lines of credit

•   Ability to bypass security deposits or pay lower amounts in some cases

Those with low credit scores or who lack a credit history will have difficulty qualifying when they apply for new credit accounts; this includes loans, credit cards, mortgages, and rental homes. If they do qualify, their rates may well be higher than those offered to someone with a higher credit score.

How big a difference could this make? A very big difference, to be honest. To illustrate what a lower credit score may cost you: A credit score in the low-600s may be quoted a mortgage rate that’s up to 1.5% higher than someone with a 750+ credit score. Over the life of the loan, that 1.5% difference can cost you an extra $50,000 more in interest over the life of a $200,000 mortgage loan.

So, it can certainly pay to tend to one’s score, getting and keeping that number as high as possible. Now, let’s look at how bank accounts can impact your credit score.

The Importance of Managing Your Checking Account

Your checking account is the foundation of so much of your financial life. Chances are, your paycheck and all your bills cycle through your checking account. Automatic payments and debit card purchases all rely on that account having a positive balance.

While life today moves at warp speed and it’s easy to get distracted, it’s a good habit to check your account at least weekly, if not more often. The goal here is to make sure you haven’t overdrawn your account, that you know your balance, and that you’re attuned to any unauthorized activity that might crop up.

The Takeaway

Opening and maintaining a checking account doesn’t necessarily have any impact on your credit score. However, responsibly managing your checking account is an important facet of living your best financial life. It’s the key to avoiding any unnecessary fees, ensuring that you have enough funds to cover daily transactions, and making sure your credit score doesn’t suffer. By watching your balance and reviewing your account history, you can keep your checking account in top shape.

Another way to keep your account in great condition is to find a banking partner that gives you lofty interest rates and negligible fees. For instance, here at SoFi Checking and Savings, we offer 1.25% APY on accounts that have direct deposit. Plus, we charge zero account fees and you can access your paycheck up to two days early.

Check out how smart and simple banking with SoFi can be.

FAQ

Does opening a checking account help your credit score?

Typically, opening a checking account neither helps nor hurts your credit score. There are, however, certain situations (like applying for overdraft protection) that might lower your score.

Does owing a bank money affect your credit?

If you owe a bank overdraft or other fees, yes, it can negatively affect your credit. Just like any other unpaid bills, these delinquent charges can go on your credit report and lower your credit score. They show that you aren’t doing an A-plus job of managing your money and your debts.

What bank accounts help build credit?

The details of your bank accounts typically are not filed with the three credit reporting agencies and therefore not build or harm your credit. However, if you have unpaid fees on a bank account and certain other conditions, those could hurt your credit.


SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

Photo credit: iStock/Delmaine Donson
SOBK0322003

Read more
TLS 1.2 Encrypted
Equal Housing Lender