SoFi

If you ever see a bank error made in your favor, you might think, “Free money!” but the truth is, you need to report the error ASAP.

An unfortunate fact of life is that people — and sometimes technology — can make mistakes. Every once in a while, your bank might make an error and deposit cash into your account that wasn’t meant for you. A teller at a bank branch could have entered the wrong digit in an account number as a customer tried to deposit a check or transfer funds, for example. Whatever the reason, you’ll notice that your bank account balance is higher than it ought to be.

While this may seem like a cash windfall and you might be tempted to keep the money, you should report the error to your bank as soon as you notice it. That way, the mistake can be corrected as quickly as possible.

Let’s take a closer look at this scenario and answer these questions:

•  Can I keep money from a bank error?

•  Is there a penalty if I keep money from a bank error?

•  How and when should I report the error?

Can I Keep the Money from a Bank Error in My Favor?

So what happens when money is accidentally deposited into your account? You may wonder if it’s a case of “finders, keepers.” Well, the only time that you can keep funds added to your account is when the money deposited was legitimately meant for you.

When a bank error occurs in your favor, you cannot keep the money — even if the error seems small and likely to fly under the radar. The money isn’t legally yours, so you must return it.

What’s more, the customer whose money accidentally landed in your account will probably notice the mistake and ask the bank to track down the money. Or, the bank will catch the mistake in one of the regular audits that it makes on accounts and withdraw the money again. If the money isn’t in your account, they may ask you why you didn’t report the mistake earlier.

Recommended: Ways to Deposit Money into a Bank Account

What Is the Penalty for Attempting to Spend or Keep the Money?

Now, let’s consider what would happen if you didn’t report and return the money mistakenly put in your account. Even if you are a person who doesn’t pay much attention to your banking details and assume the money is yours, it is still a big problem if you use it. If you spend the money from a bank error in your favor, move it to another account, invest it, or give it away, you could wind up in a lot of hot water.

Failing to return the money may be tantamount to theft, and you could face criminal charges, such as theft of property lost by mistake or receiving stolen property. Criminal charges may be made to get a court order to force you to repay the amount, and in some cases, you could end up with probation or prison time. That’s a very good reason to get the funds back to your bank as soon as you realize there’s been an error.

A few years ago, a Pennsylvania couple went on a spending spree when their bank accidentally deposited $120,000 in their account instead of a business’ account due to a teller error. The couple bought various vehicles with the money and also gave $15,000 away to friends in need.

The bank requested that the couple return the money and then reversed the transfer, causing an overdraft on the couple’s account of over $100,000. The couple was eventually convicted of theft, sentenced to seven years’ probation, 100 hours of community service, and ordered to repay the money they stole. Surely, this is a good example of why there’s no such thing as free money in this situation.

When Should I Report the Error?

If you discover money in your account and can’t explain where it came from, contact your bank right away, and ask them to figure out the origins of the funds. If it turns out the money really was for you — perhaps a relative deposited it in your account as a gift, for example — your bank will let you know that you are free to access the funds and use them for whatever you’d like.

If the funds weren’t originally meant for you, the bank can start the process of reversing the transaction.

To report the error, first call your bank. Take down the name of the person you talked to and make a note of the time and date. Follow up your call with an email that outlines the details of the error. That way, you’ll have a paper trail of your attempts to correct the issue. The time frame in which to report a bank error varies, so check with your particular account’s fine print to know the specifics.

What Happens if the Bank Does Not Respond?

Generally speaking, banks have 10 days to complete an investigation into an account error. But it is possible the investigation could take as long as 45 days. You can take a look at your deposit account agreement to find out how long it should take your bank.

If nothing has changed after that period of time, contact your bank again to check in on the progress of the investigation. Do not assume the money has somehow become rightfully yours. You don’t want to make a bad situation worse, cause legal action, and wind up eventually having to hire a lawyer to represent you.

What Should I Do So That I Don’t Get in Trouble?

When an erroneous deposit is made to your account, here are the steps you should take to help ensure that you don’t get into any trouble.

Do Not Touch or Transfer Money

First things first, if you notice money in your account that’s not yours, don’t touch it. Don’t spend, don’t give it to someone else, and don’t move it into a different account. Don’t even spend the money if you plan to repay it and report the mistake later. Anything you do to tamper with the money, no matter how benign it seems, could have big consequences later.

Contact Your Bank

As we mentioned above, contact your bank immediately when you notice the error, and keep records of your interactions.

Monitor Your Account

Get in the habit of scoping out your financial accounts regularly, whether it’s checking your credit report, bank account, or even checking medical bills for errors. The fact that even your bank can accidentally deposit money into your account illustrates the necessity of reviewing your bank account regularly.

If you don’t look at your account statement frequently, you may not notice small errors, and these can have a big impact on your personal finances. How often should you check your bank account? There’s no precise answer, but between once a week and once a month can be a good place to start.

For example, say a small deposit of just a few hundred dollars is accidentally made to your checking account. Say, too, that you don’t notice the deposit and spend some of the funds. When the bank discovers the mistake, they can withdraw the funds without your permission, freeze your account, or put a hold on your funds. If you’re still operating unaware of the erroneous deposit, this can wreak havoc on your account. It could cause overdrafts or your checks to bounce. It might gum up the works on any automated bill pay that you may have set up.

As a result, you may be on the hook for overdraft fees, or you may end up paying some bills late.

Keeping careful tabs on your account can help you catch errors so you can avoid these situations and improve your financial health. Consider setting up alerts for deposits in your account. That way you can spot any mistakes as soon as they happen. You may want to consider other automatic ways to monitor your finances, such as credit score monitoring and card security and protection, to help keep your accounts safe.

The Takeaway

Now you know what to do if money is accidentally deposited into your bank account. If a financial institution makes a mistake in your favor, sorry to say, this isn’t the moment to go on a spending spree. The best thing you can do is act quickly to alert your bank. That way, the error can be corrected, the right person can receive the money they need, and you can continue banking as usual. If you fail to do so, you could wind up with overdrafts and other issues when the bank takes the money back. Worse still, you could face legal consequences with far-reaching effects. So do the right thing, and keep your financial life on the up and up.

Here’s a no-funny-business way to help your money grow: Bank with SoFi. We’re committed to zero account fees as well as superior interest rates. Sign up for our Checking and Savings with direct deposit, and you’ll earn a super competitive 4.20% APY which is 41 times the current national checking account average. Plus, we won’t deduct any monthly, minimum balance, or overdraft fees.

Bank smarter with SoFi.

FAQ

Can I keep money credited in error to me?

No, you cannot keep money that is deposited in your account in error. You should alert your bank and have the funds redirected to their rightful owner.

Do I have to report a bank error?

Yes, you should report the error. Contact your bank and report the mistaken deposit as soon as you notice it so the problem can be corrected.

What happens if the bank makes a mistake? Who is responsible and why?

If your bank makes a mistake, you should alert them as soon as you notice it. Your bank will also run regular audits of your accounts, which can help them catch errors. When they do catch a mistake, it must be resolved with the funds going back to the correct account. To do so, the bank can reverse transfers, withdraw funds from your account, freeze your account, or place a hold on the funds without your permission. If the money isn’t there, you will be asked to repay it, and you may face criminal charges.

---

Photo credit: iStock/fizkes

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
SoFi members with direct deposit can earn up to 4.20% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 1.20% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 4/25/2023. There is no minimum balance requirement. 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.
This article is not intended to be legal advice. Please consult an attorney for advice.
SOBK0422012

Read more

For those hoping to retire early, or at least before the average retirement age, a mega backdoor Roth IRA can be an effective tool.

Only a certain type of investor will want to employ a mega backdoor Roth IRA as a part of their financial plans. For those people, figuring out how to efficiently save and invest money for retirement can be a challenge. That’s where the mega backdoor Roth IRA enters the conversation.

Below, we’ll walk through what mega backdoor Roth IRAs are and how they work. In addition, we’ll discuss the important details that investors need to know about them.

What is a Mega Backdoor Roth IRA?

The mega backdoor Roth IRA is a retirement savings power move, in which people who have 401(k) plans through their employer—along with the ability to make after-tax contributions to that plan—can rollover the after-tax contributions into a Roth IRA.

Before getting too far in depth, though, it’s important to understand the basics of regular old Roth IRAs.

A Roth IRA is a retirement account for individuals (vs an employer-sponsored account like a 401(k)). Account holders can contribute up to $6,000 per year (or $7,000 for those older than age 50) of their post-tax earnings. That is, income tax is being paid upfront on those earnings—the opposite of a traditional IRA.

The payoff comes later. Individuals can withdraw their contributions at any time, without paying taxes or penalties. For that reason, Roth IRAs are attractive and useful savings vehicles for many people.

But Roth IRAs have their limits—and one of them is that people can only contribute to one if their income is below a certain threshold. In 2022 the limit is $129,000 for single people (people earning more than $129,000 but less than $144,000 can contribute a reduced amount); for married people who file taxes jointly, the limit is $204,000 (or up to $214,000 to contribute a reduced amount).

The Backdoor Roth IRA

Generally, individuals with income levels above those thresholds who wish to contribute to a Roth IRA are out of luck. However, there is a workaround: the backdoor Roth IRA.

A backdoor Roth IRA allows high-earners to fund a Roth IRA account by converting funds in a traditional IRA (which has no limits on a contributors’ earnings) into a Roth IRA. This could be useful if an individual expects to be in a higher income bracket at retirement than they are currently.

However, converting a traditional IRA to a Roth IRA could result in significant taxes, as the IRS will apply income tax to contributions that were previously deducted.

The mega backdoor Roth IRA

Mega backdoor Roth IRAs involve 401(k) plans. People who have 401(k) plans through their employer—along with the ability to make after-tax contributions to that plan—can roll over up to $37,500 in after-tax contributions into a Roth IRA. That mega Roth transfer limit has the potential to boost an individual’s retirement savings.

It’s complicated, and there are a lot of factors at play. But like the backdoor Roth IRA, the mega backdoor Roth IRA is another way to sidestep the normal contribution limits of Roth IRAs.

How to Pull Off a Mega Backdoor Roth IRA

The mega backdoor Roth IRA process is pretty much the same as that of a backdoor Roth IRA. The key difference is that while the regular backdoor involves converting funds from a Traditional IRA into a Roth IRA, the mega backdoor involves converting after-tax funds from a 401(k) into a Roth IRA.

Whether a mega Roth IRA is even an option will depend on an individual’s specific circumstances. These are the necessary conditions that need to be in place for someone to try a mega backdoor strategy:

•  You have a 401(k) plan. People hoping to enact the mega backdoor strategy will need to be enrolled in their employer-sponsored 401(k) plan.

•  You can make after-tax contributions to your 401(k). Determine whether an employer will allow for additional, after-tax contributions, and what that maximum contribution is. The standard 401(k) contribution limit is $20,500 (or $27,000 for those 50 and older). After-tax contributions allow for the opportunity to save, potentially, tens of thousands more per year. The IRS allows up to $61,000, or $67,500 including catch-up contributions, in total contributions per year.

•  The 401(k) plan allows for in-service distributions. A final piece of the puzzle is to determine whether a 401(k) plan allows non-hardship distributions to either a Roth IRA or Roth 401(k). If not, that money will remain in the 401(k) account until the owner leaves the company, with no chance of a mega backdoor Roth IRA move.

If those conditions exist, a mega backdoor strategy should be possible. Your next step: Open a Roth IRA—so there’s an account to transfer those additional funds to.

From there, pulling off the mega backdoor Roth IRA strategy can be deceptively simple—max out 401(k) contributions and after-tax 401(k) contributions, and then transfer those after-tax contributions to the Roth IRA.

But be warned: There may be many unforeseen hurdles or expenses that arise during the process, and for that reason, consulting with a financial professional to help navigate is likely advisable.

Advantages of the Mega Backdoor Roth IRA

Given that this Roth IRA workaround has so many moving parts, it’s worth revisiting wyhy, exactly, someone would be interested in a mega backdoor Roth IRA.

The main advantage of the concept is for those who are earning too much to contribute to a Roth IRA, but who want to take advantage of tax-free growth. Plus, with a mega backdoor Roth IRA an individual can effectively supercharge retirement savings because more money can be stashed away. It can also offer a way to further diversify retirement savings.

The Takeaway

Strategies like the mega backdoor Roth IRA can be used by some investors to help achieve their retirement goals—as long as specific conditions are met, including having a 401(k) plan that accepts after-tax contributions.

While retirement may feel like a lifetime away, especially if you’re early in your career or still relatively young, most financial professionals generally recommend that you start thinking about it sooner rather than later.

With SoFi Invest® online brokerage account you can size up your retirement goals and start making progress towards accomplishing them. SoFi offers Roth or traditional IRAs, as well as other investment vehicles.

Find out how SoFi can be part of your financial future.

---

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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.
SOIN21060

Read more