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Both certificates of deposit (CDs) and money market accounts (MMAs) are low-risk accounts that tend to earn higher interest rates than traditional savings accounts. But the primary difference between a money market account vs. a certificate of deposit is accessibility. An MMA is like a savings account in that you can withdraw money as needed; with a CD, your money is locked up for a period of time.

There are some other differences between a money market account vs. a certificate of deposit, but that’s the main one. Keep reading to learn the difference between these types of deposit accounts and what their pros and cons might be.

Recommended: What is Liquid Net Worth

What Is a Money Market Account?

Banks and credit unions offer a type of deposit account known as a money market account (also referred to as money market deposit accounts or money market savings accounts).

Money market accounts function much like regular savings accounts. It’s possible to withdraw funds from a money market account by draft, debit card, or electronic transfer. But MMAs may offer check-writing privileges as well. And like a traditional savings account, the money you deposit in an MMA is insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), if held at a bank, or by the National Credit Union Administration (NCUA), if held at a credit union.

Pros of Money Market Accounts

Let’s look at some advantages associated with money market accounts.

•   Security. Because of the FDIC and NCUA insurance the funds in a money market account (up to $250,000) are insured against loss.

•   Higher interest rate. Typically, money market accounts have higher interest rates than normal savings accounts.

•   Liquidity. Those looking to keep their money close at hand while still earning interest on it will appreciate how liquid money market funds are compared with other investment vehicles, like a CD.

•   Ease of access. It’s possible to access the funds in a money market account by withdrawing cash, doing an electronic transfer, or even writing checks.

Cons of Money Market Accounts

Of course, there are also some disadvantages that come with money market accounts that are worth keeping in mind.

•   Minimum balance requirements. As mentioned earlier, banks and credit unions often require a minimum deposit to open a checking or savings, and an MMA is no exception. This amount is often higher than the one required for a traditional savings account. And in some cases, it might be necessary to maintain that minimum balance in order to avoid monthly maintenance fees.

•   Limited transactions. Federal banking regulations make it so account holders can’t make more than six withdrawals or transfers a month (typically this restriction applies to checks, debit card payments, wire transfers and other electronic transfers). The transfers you make in person, at an ATM, or via mail, are not restricted. If you exceed the number of allowed transactions per month, you will receive a warning from the bank and may be assessed a fine.

•   Interest rates vary. Saving interest rates can fluctuate as they are based on the overall market’s interest rates at a given time. It’s difficult to predict how the market will perform and if this interest rate will rise or fall.

•   Limited growth potential. Those hoping to experience higher long-term growth can potentially make more by investing their money elsewhere.

What Is a Certificate of Deposit?

A certificate of deposit is another savings vehicle offered by banks, but these products provide less flexibility than a money market account. Typically the funds deposited must remain untouched for a period of time, ranging from a few months to a few years. In exchange for leaving their money in the CD, the institution agrees to pay a higher interest rate.

Thus the money deposited in a CD is typically called the principal, because it is essentially a loan the consumer is offering to the bank. The interest the customer collects is what the bank pays for the privilege of borrowing the money.

If the CD owner decides to withdraw the money early, they will need to pay a withdrawal penalty (except in the case of a no penalty CD).

There are a few different types of CDs available and each come with varying deposit requirements and term lengths that can suit different financial goals.

Recommended: Average Savings by Age

Pros of Certificate of Deposits

Let’s take a closer look at some of the advantages that come with depositing money into a CD.

•   Potentially higher rates. CDs can have higher APYs (annual percentage yields) than regular savings accounts or money market accounts. Longer-term CDs usually have even higher interest rates.

•   Fixed rates can provide certainty. Because CDs tend to have fixed rates for fixed terms, the investor knows up front how long their money needs to stay in the CD and how much they will earn.

•   Security. Similar to money market accounts, CDs are either FDIC or NCUA insured.

•   Convenience. It’s fairly easy to open a CD as most banks and credit unions offer them.

Cons of Certificate of Deposits

Of course, there are also some disadvantages of CDs that are good to be aware of.

•   Lower rates than other investments. CDs often offer better interest rates than other deposit accounts, but they don’t usually offer competitive advantages over investments like stocks and bonds that can lead to longer- term growth.

•   Fixed interest rates can be limiting. Because CDs come with fixed interest rates, if the market improves and interest rates go up, the CD owner can be stuck with a lower interest rate until the CD term ends (unless they open a bump-up CD)

•   Withdrawal penalties. More often than not the CD owner has to keep the funds held in the CD until the term ends or they will need to pay an early withdrawal penalty.

•   Limited access. Unlike a money market account or savings account, it’s not possible to access the money in a CD until the term ends.

Where Can You Find Money Market Accounts and CDs?

As previously noted, both CDs and money market accounts are available at banks, credit unions, and select financial institutions.

In many cases you can open either of these accounts online, over the phone, or in person.

Because interest rates vary widely, it’s a good idea to do some research to decide whether you want to open a money market account vs. a certificate of deposit, and which institution has the most favorable terms.

Differences Between a Money Market Account and a Certificate of Deposit

Not sure which type of account is the right fit? These are the main differences to consider when choosing between a money market account vs. a CD.

•   Withdrawals. It’s possible to make withdrawals a month from a money market account (some restrictions can apply), but CD funds are typically unavailable until the end of the term.

•   Interest rates. CDs tend to offer higher interest rates (fixed) than money market accounts (variable).

•   Penalties. One withdrawal from a CD can lead to a penalty, whereas you can typically withdraw money at any point from a money market account (although in some cases, especially with regard to electronic transfers the number may be capped at six withdrawals per month).

When to Choose a Money Market Account Over a CD

Here’s a brief look at when a money market may be a better choice than a CD.

•   When they require accessibility. Someone who requires more access to their savings will appreciate the flexibility and liquidity that comes with a money market account.

•   When building an emergency fund. A money market account is a great place to earn a little extra interest on an emergency fund that the account holder doesn’t need to access often.

When to Choose a CD Over a Money Market Account

There will be times when a CD is a better fit for a consumer than a money market account.

•   When they have longer term investment goals. If someone wants to earn more money in interest, they’ll find a CD is a better fit thanks to longer terms and higher interest rates.

•   When they won’t miss the money. If the consumer is confident they won’t need to access the funds before the CD term ends, they can earn extra interest in a safer way than investing in stocks.

The Takeaway

Both money market accounts and CDs offer safe ways to earn extra interest on savings compared with a traditional savings account. While money market accounts offer more flexibility and liquidity than CDs, CDs may have higher interest rates.

The main difference between money markets and CDs is that with the former you can access your money virtually any time — and with the latter your funds are unavailable until the CD matures. The length or term of a CD typically ranges from a few months to a few years.

If you’re ready to open a savings account, one easy way is through SoFi’s all-in-one Checking and Savings. You can sign up for an account right from your phone and pay zero account fees — and if you qualify by setting up direct deposit you can earn a competitive APY.

FAQ

Can you lose your money in a money market account?

It’s highly unlikely. Money market accounts at banks are insured by the FDIC, and money market accounts at credit unions are insured by the NCUA (up to a certain amount).

Why would you choose a CD over a money market account?

If you don’t need to access your funds for a while, a CD could be a better fit. CDs tend to offer higher interest rates than money market accounts, and the interest rate is fixed which makes the return predictable.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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/Vanessa Nunes
SOBK0322040

Sometimes things just don’t go according to plan, and those quick, convenient ACH payments wind up getting returned or needing to be reversed. Usually, these electronic transactions run smoothly, but at times, the funds don’t or can’t get from point A to point B.

Here, we’ll take a look at why ACH payments are sometimes returned. We’ll cover:

•   What ACH turns are

•   Terms to know about ACH returns

•   What the difference is between an ACH return and a Notice of Change

•   How to return an ACH payment

What Are ACH Returns?

Are you wondering, “Can ACH payments be returned?” The answer is, “Most definitely!” These electronic transfers of funds are not necessarily a one-way street.

While most payments are likely to go through, ACH returns occur when an ACH payment (aka an online payment transaction) fails to be completed. This can happen for a few reasons, such as:

•   The originator providing inaccurate payment information or data

•   The originator providing non-existent or inadequate authorization

•   The originator isn’t authorized to debit the client’s account with an ACH payment

•   Insufficient funds to cover the transaction (which can happen, especially if the person paying doesn’t balance a bank account regularly)

Next, let’s look at how an ACH return transpires. If a merchant wants to debit their client’s account, the merchant’s bank (at the merchant’s request) will send a request for an ACH debit from the client’s account. The client’s relevant ACH network will then receive an ACH payment request. Then the merchant’s bank will debit the client’s account and the merchant’s account will be credited with the amount of money indicated in the ACH payment request.

At this point, the ACH network should send the ACH transaction to the client’s bank. After receiving the ACH form, if all required conditions are met, they will then debit their client’s account for the amount they owe the merchant.

If for some reason the client’s bank account alerts the ACH network that they are not able to complete the transaction, the money will remain in the client’s account. That’s an ACH return.

It costs money to process an ACH return, and that cost falls on the consumer. Similar to how consumers get charged a fee when they bounce a check, the consumer will need to pay a fee if an ACH return occurs. This banking fee is fairly small and typically only costs $2 to $5 per return.

Recommended: Average Savings by Age

Important Terms to Know About ACH Returns

To better understand how ACH returns work, it’s helpful to know a bit of the industry’s vocabulary — particularly ODFI and RDFI (which are the two parties involved in every ACH return). Here’s what these acronyms mean:

•   ODFI (Originating Depository Financial Institution): The originator of the transaction who’ll send funds

•   RDFI (Receiving Depository Financial Institution): The receiver of the funds

Another facet of ACH lingo that’s helpful to know are ACH return codes. Any ACH return that occurs will generate an ACH return code. These ACH return codes are made up of the letter R followed by some numerals. Each code represents a different reason for a return. These codes can be helpful because they inform the originator of why the ACH return happened.

The following ACH return codes are fairly common:

•   R01 – Insufficient funds. This code means that the available assets can’t cover the debit entry (like when an account is overdrawn).

•   R02 – Account closed. In other words, the client or the RDFI closed the account that should be debited or credited through an ACH payment.

•   R03 – No account/unable to locate account. In this case, the return occurred because the account intended for ACH payment doesn’t exist or the account’s owner is not the one noted by the debit entry.

•   R04 – Invalid account number structure. If something is wrong with the client’s bank account number or the number doesn’t pass validation, a R04 return code results.

•   R05 – Unauthorized debit to a consumer account. If the receiver hasn’t authorized the originator to request an ACH transfer from their bank account, the transfer can be blocked. This ACH code will occur.

It’s worth noting that R05 return codes work a bit differently. Unlike the other ACH return codes listed, the return time frame for R05 is 60 banking days instead of two. This longer time frame gives the originator a chance to ask the receiver to allow the ACH transfer to occur or to provide them with a new bank account number to complete the transaction.

What Is the Difference Between a Notice of Change (NOC) And ACH Return?

It’s easy to confuse a Notice of Change (NOC) and an ACH return, but these are two different things. Let’s clarify the difference in these banking terms and processes. A Notice of Change, or NOC, is a method used by financial institutions to notify a federal agency to correct or change account information. It applies to an entry processed by the federal agency through the ACH. A NOC is not a form of payment in and of itself. Nor does it represent a failure to complete an ACH payment transaction. It’s a request for an edit, basically, while an ACH return actually stops a transaction.

Recommended: What is Liquid Net Worth

When Can You Request a Reversal of an ACH Payment?

For a reversal to occur on an ACH payment, certain requirements have to be met. Here are the guidelines for successfully putting the brakes on a transaction:

•   The reversal entry has to be transmitted to the bank within five banking days after the settlement date of the erroneous file.

•   Transmitting the reversing file has to occur within 24 hours of discovering the error.

If these criteria are met, the reversal of an ACH payment can proceed.

Why You Might Be Receiving an ACH Return

As you monitor your bank account, you may see that an ACH transaction, which usually happens so smoothly, is being returned. This can occur for a variety of reasons. For instance, the originator may have provided inaccurate payment information or may not have been authorized to debit the client’s account with an ACH payment. The codes reviewed above can also shed light on why the transfer of funds was stopped. By the way, both returned mobile ACH payments and returned ACH card payments can occur.

How to Return an ACH Payment

Returning an ACH payment involves simply stopping the payment from going through. This can happen in a couple of ways. Let’s say a bank can’t complete the transaction due to an error in the account number or the fact that the account was closed. Here’s what would likely happen:

1.    The client’s bank notifies the ACH network that they can’t complete the transaction.

2.    The money remains in the client’s account, and the originator will receive an ACH return code.

3.    The return gets processed, usually taking two bankings days.

Another way a return could happen is a customer could, say, decide to cancel an automatic bill payment. In this case, here’s how things would probably unfold:

1.    The customer would contact the business expecting payment and let them know they are ending the agreement and the company will no longer be able to access their account.

2.    The customer lets the bank know they are ending the autopay. How exactly this will be completed depends on the bank. It may need to be in writing.

3.    The request to end the autopay must be made at least three business days before a payment is due, to allow time for processing.

The Takeaway

While ACH payments are a super convenient payment method, sometimes a funds transfer fails to go through. In this situation, a returned ACH payment occurs. ACH returns can happen for a few reasons (such as the client’s bank account contains insufficient funds to complete the transfer). The entire process is fairly quick and is usually completed within two banking days. As more and more electronic transfers happen, it’s wise to be aware of this system that can step in if details are incorrect or one party can’t or won’t hold up their end of the arrangement.

Speaking of financial arrangements, take a moment to acquaint yourself with better banking at SoFi. We think you’ll be glad you did! With our linked Checking and Savings accounts, you’ll earn an amazing APY when you sign up for direct deposit. Plus, you’ll pay zero account fees and have access to your paycheck up to 48 hours early.

FAQ

What’s the time frame for an ACH debit return?

It usually takes two banking days for an ACH return to complete. However, there are select ACH return codes that result in a 60 banking-day return period.

How much are ACH return fees?

Fees vary, but they usually cost about $2 to $5 per return. The consumer pays this charge. It’s similar to paying a fee for a bounced check.

What are ACH return codes?

Every time an ACH return happens, the originator will be sent an ACH return code. This code is represented by the letter R and a two-figure number and explains why the return happened. For example, a R01 return code indicates that the client’s bank account contains insufficient funds to complete the transfer.

Can returned ACH payments be disputed?

Yes, ACH returns can be disputed. What that process looks like varies with the reason why the ACH return occurred. Every ACH return code has a specific return time frame associated with it. Only during that time frame can the client dispute the ACH return.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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.

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/Nicola Katie
SOBK0322030

ACH return codes are generated when an ACH (Automated Clearing House) payment fails to process and therefore gets returned. Usually, ACH payments can be a huge convenience for so many transactions, like setting up automatic monthly bill pay or receiving direct deposit of one’s paycheck. But when conducting business, there are likely to be times when a transaction doesn’t work as expected. ACH return codes indicate exactly what went wrong.

Here, we’ll take a look at what ACH return codes are, what the most common ones mean, and what to do if you receive one. With this knowledge, you’ll be better prepared to understand and respond if you get an ACH return code notification.

What Are ACH Return Codes?

To understand what an ACH return code is, it helps to understand what ACH returns are. ACH returns occur when an ACH payment (in other words, an online payment transaction) can’t be completed.

There are a few reasons why these transactions aren’t successful, including:

•   The originator providing inaccurate payment information or data

•   The originator providing non-existent or inadequate authorization

•   The originator isn’t authorized to debit the client’s account with an ACH payment

•   The recipient doesn’t have enough funds

Once an ACH transaction is returned to the originator (the one who requested payment), a specific return code — sometimes referred to as ACH return reason codes — will be generated. This return code will let all parties involved in the transaction know why the ACH payment needed to be returned. These parties can include originators, receivers, and banks.

Essentially, each ACH return code provides the reason for why the assets weren’t collected from the originator’s account; say, why an automatic bill pay that was previously running well suddenly stopped or why a one-time payment could go through. To put it a different way, it explains why the Originating Depository Financial Institution (ODFI) or why the Receiving Depository Financial Institution (RDFI) wasn’t able to transfer the assets to the recipient’s account.

ACH return codes can help identify the problem with the transaction and quicken the ACH transfer processing time.

If an ACH return occurs, the consumer will be on the hook for an ACH return charge. It’s similar to when a check bounces; the consumer pays a small fee; in this case, usually $2 to $5.

The timing of ACH transactions is usually quite quick. Similarly, ACH returns tend to be processed pretty fast. If you’re tracking ACH transactions, you’ll see that most ACH refunds only take about two banking days to occur. That being said, some ACH return codes can result in the return taking as much as sixty banking days to process.

Common ACH Return Codes

Now that you have a solid overview of ACH returns, let’s take a look at some common ACH return codes. We’ll explain what they mean, as well as what to do when faced with one.

Code: R01
Meaning: Insufficient funds (the account’s available balance isn’t sufficient to cover the funds transfer, similar to being in overdraft)
What to do: Attempt the transaction again as a new transaction within 30 days of the original authorization date (up to two times)

Code: R02
Meaning: Account closed (a once-active account has been closed)
What to do: Request the customer provide a different bank account or form of payment

Code: R03
Meaning: No account exists or unable to locate account (even though the account number structure is valid, it doesn’t pass the check digit validation)
What to do: Contact the customer to confirm their routing number, bank account number, and the name on the bank account. If this information differs from what was originally entered, submit a new payment with these new details

Code: R04
Meaning: Invalid account number
What to do: Obtain the correct bank account number and submit a new payment with that account number

Code: R05
Meaning: Unauthorized debit entry
What to do: Contact the customer and ask for a new form of payment or for them to call their bank and remove the block on transactions (aka authorize the funds transfer)

Code: R06
Meaning: Returned at ODFI’s request (ODFI requested that the RDFI return the ACH entry)
What to do: Request that the RDFI agree to return the entry and then the ODFI must indemnify the RDFI according to Article Five

Code: R07
Meaning: Authorization revoked by customer
What to do: Suspend recurring payment schedules entered for this specific bank account to prevent additional transactions from being returned. Then address the issue with the customer and try to resolve the issue by getting a new form of paying or asking to debit a new bank account

Code: R08
Meaning: Payment stopped or stop payment on item (the receiver of a recurring debit transaction can stop payment on any specific ACH debit)
What to do: Contact the customer to resolve the issue and then re-enter the returned transaction again with proper authorization from the customer, or get a new form of payment

Code: R09
Meaning: Uncollected funds (even though a sufficient book or ledger balance can meet the transaction value, if the transaction brings the available and/or cash reserve balance below the dollar value of the debit entry, then a return will occur)
What to do: Try the transaction again, and re-enter it as a new one within 30 days of the original authorization date (up to two times)

Code: R10
Meaning: Customer advises not authorized, item is ineligible, notice is not provided, signatures are not genuine, or item is altered (adjustment entries)
What to do: Receiver can request credit from the RDFI for an unauthorized debit within 15 days after the RDFI sends the receiver information regarding the debit entry. It’s also possible to immediately suspend any recurring payment schedules entered for this bank account or to ask the customer for a different form of payment or account to debit

Code: R11
Meaning: Customer advises that the entry doesn’t comply with authorization terms
What to do: The originator can correct the underlying error and resubmit the corrected entry as a new entry

Code: R12
Meaning: Branch sold to another DFI (development financial institution)
What to do: Obtain the customer’s new routing and bank account information, and submit a new transaction

Recommended: What is Liquid Net Worth

More ACH Return Codes

The following ACH return codes are less common than those mentioned previously, but still occur and are worth knowing. Here’s a look at what makes these codes tick:

Code: R13
Meaning: RDFI not qualified to participate in ACH or the provided routing number is wrong
What to do: Confirm originally submitted routing information is correct, or get the correct routing number from the customer to use when submitting a new payment

Code: R14
Meaning: Representative payee is deceased or can’t continue in that capacity
What to do: No further action can be taken

Code: R15
Meaning: Beneficiary or account holder is deceased
What to do: No further action can be taken

Code: R16
Meaning: Account is frozen and funds are unavailable
What to do: Obtain a new payment form

Code: R17
Meaning: File record edit criteria — specify (or, to rephrase it, the entry cannot be processed by the RDFI)
What to do: The fields causing the processing error need to be identified in the addenda record information field of the return

Code: R20
Meaning: Non-transaction account (aka an account against which transactions are prohibited or limited)
What to do: Contact the customer and request the authorization to charge a different bank account or for a new form of payment

Code: R21
Meaning: Invalid company identification
What to do: No further action can be taken

Code: R22
Meaning: Invalid individual ID number
What to do: No further action can be taken

Code: R23
Meaning: Credit entry is refused by the receiver until certain conditions are met
What to do: Work with the customer to clear up the issue, or have them work with their bank to resolve it. The customer needs to confirm the refund will be accepted, and then it’s possible to refund the transaction

Code: R24
Meaning: Duplicate entry
What to do: The originator can generate a reversal transaction

Code: R29
Meaning: Corporate customer advises ACH payment is not authorized
What to do: Suspend recurring payment schedules, and then address the issue with the customer. Have them provide new payment information or contact their bank to authorize the payment

Code: R31
Meaning: Permissible return entry (CCD, or cash concentration disbursement, and CTX, or corporate trade exchange, only)
What to do: The business bank account holder or the bank can request a return and the ODFI can choose to accept this late return. It’s also possible to ask for a different form of payment or bank account

Code: R33
Meaning: Return of XCK, or destroyed check, Entry
What to do: No further action can be taken

Recommended: Average Savings by Age

The Takeaway

To recap, what are ACH return codes? In short, ACH return codes represent the reason why an electronic Automated Clearing House payment could not be completed. Knowing what each code represents can help determine what the next steps should be to keep payments flowing smoothly or refunds being completed. Typically, ACH transactions are a convenience and allow for faster, easier transfers of funds. Codes are part of this quick way to conduct transactions.

Need an easy way to receive payments when managing your personal banking? SoFi makes it easy and profitable for you. Set up linked Checking and Savings with direct deposit, and you’ll earn an excellent APY. What’s more, we won’t charge you any account fees, so your money grows faster. And your paycheck? You’ll be able to access it up to two days earlier. And who doesn’t want to get their paycheck early?

FAQ

What causes an ACH return?

ACH returns occur when an Automated Clearing House payment can’t be completed. When this happens, an ACH return code is generated; this code provides a reason for the return.

What is ACH return fee?

When ACH returns occur, a fee is charged. It’s similar to how a bounced check incurs a fee. How much this fee will cost varies, but generally it costs around $2 to $5. The consumer pays this fee.

How long does an ACH refund take?

ACH refunds move fairly quickly. Typically an ACH refund only takes about two banking days to occur. However, for some ACH return codes, the refund period can be as long as sixty banking days.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

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

Photo credit: iStock/Delmaine Donson
SOBK0322029

What are brokered certificates of deposit? A brokered CD is one that’s sold by a brokerage firm or deposit broker, rather than a bank. Brokered CDs may offer higher rates than traditional CDs sold at a bank, but they can also entail greater risk for investors.

Before investing in brokered CDs, it’s important to understand how they work, how they differ from traditional CDs, and the potential pros and cons of these accounts.

What Is a Brokered Certificate of Deposit?

A certificate of deposit is a time deposit account that allows you to deposit money and earn interest over a set time period called the term, usually a few months to five years. When a traditional CD reaches maturity, you can withdraw the principal plus interest, or roll it over to another CD. Traditional CDs are generally FDIC insured.

A brokered CD is a type of CD that’s offered by a stockbroker or brokerage firm that’s authorized to act as a deposit broker on behalf of an issuing bank. It may be a bank product or a security, so brokered CDs are not always FDIC insured.

So what is a brokered CD in simpler terms? It’s a CD you buy from a brokerage. A deposit broker buys the CDs from a bank, then resells them to investors. Brokered CDs are held in a brokerage account. They can earn interest, but instead of only being static investments that you hold until maturity, you can trade them like bonds or other securities on the secondary market.

Compared to a standard CD, a brokered CD may require a higher minimum deposit. For example, you may need $10,000 to open one versus $500 or $1,000 for a traditional bank CD. The trade-off, however, is that brokered CDs may potentially offer much higher returns than you could get with a regular CD — while still being relatively safe investments.

How Brokered CDs Work

To buy a brokered certificate of deposit, you first need to find a deposit broker that offers them. Banks can issue CDs specifically for the customers of brokerage firms. These CDs may be issued in large denominations, say $50 million. The brokerage would then break that large CD into smaller CDs to offer to its customers.

You could then buy a brokered CD, depositing the minimum amount required or more. The brokered CD then earns interest, with the APY typically corresponding to the length of the maturity term. For example, you might be offered a 12-month brokered CD earning 1.5% or a 24-month brokered CD that yields 3%.

Ordinarily, you’d have to keep the money in your CD until the CD matures (if you withdraw the funds before the CD matures, you could face an early-withdrawal penalty). You could then roll the original deposit and interest into a new CD or withdraw the total amount.

With brokered CDs, on the other hand, you have the option to sell the CD on the secondary market before it matures.

Advantages of a Brokered CD

Wondering whether a brokered CD might be right for you? Brokered CDs can offer several advantages, though they may not be the best option for every investor. Here are some of the most attractive features of a brokered certificate of deposit.

Recommended: What is Liquid Net Worth

More Flexibility Than Traditional CDs

Brokered CDs can offer more flexibility than investing in bank CDs in the sense that they can have a variety of maturity terms, so you can choose ones that fit your needs and goals. You might select a 90-day brokered CD, for example, if you’re looking for a short-term investment or choose one with a 10-year maturity if you’d prefer something with a longer term. It’s also possible to purchase multiple brokered CDs issued by different banks and hold them all in the same brokerage account for added convenience.

Easier to Get Money Out Early on the Secondary Market

With a standard CD, you’re more or less locked in to the account until it matures. (While you could take money out early if your bank allows it, it’s likely you’ll pay an early withdrawal penalty to do so. This penalty can reduce the amount of interest earned.) Brokered CDs don’t have those restrictions; if you need to get money fast then you could sell them on the secondary market, effectively cashing out your principal and interest gains — without a penalty.

Higher Yields Than Standard Bank CDs

Deposit brokers that offer brokered certificates of deposit can use the promise of higher interest rates to attract investors. Rather than earning 0.25% on a CD as you might at a bank, you could potentially earn 2% or more with a brokered CD. If you’re seeking higher returns in your portfolio with investments that offer greater liquidity, brokered CDs could hit the mark.

You may also get a higher yield from a brokered CD versus a bond, with greater liquidity to boot.

Potential to Make Profit Once It Reaches Maturity Even If Interest Rates Fall

Interest rates for brokered CDs are locked until maturity. So even if rates fall during the maturity period, you could still profit when you sell the brokered CD later. As a general rule, shorter-term brokered CDs are less susceptible to interest rate risk than ones with longer terms.

Disadvantages of a Brokered CD

Is a brokered certificate of deposit a foolproof investment? Not necessarily. Brokered CDs can have some drawbacks that investors need to know about.

Long-Term Brokered CDs Expose Investors to Interest Rate Risk

As mentioned, the longer the CD term the more exposure you have to interest rate risk. Brokered CD prices are subject to fluctuations on the secondary market. If interest rates rise, this usually has an inverse effect on the market price of existing brokered CDs. That means if you were to sell those CDs before maturity, you run the risk of getting less than what you paid for them.

Different Risk When Interest Rates Fall

You can also run into a different type of risk when rates are dropping if your brokered CDs are callable. A callable CD means the issuing bank can terminate or call the CD prior to maturity, similar to a callable bond. Callable brokered CDs can be problematic when rates drop because you’re forced to cash in your investment. In doing so, you’ll miss out on the full amount of interest you could have earned if you’d been able to hold the CD to maturity.

Investors Can Sell on the Secondary Market

The early withdrawal penalty associated with bank CDs actually serves an important purpose: It keeps you from taking money out of your CD early. Since brokered CDs don’t have this penalty, there’s nothing stopping you from selling your CDs on the secondary market whenever you like. That means it’s easier to cash out your investment, rather than sticking with it, which could cost you interest earnings.

Brokered vs Bull CD

A bull CD is a CD that offers investors an interest rate that’s tied to an index or benchmark like the S&P 500 Index. Investors are also guaranteed a minimum rate of return. Bull CDs can also be referred to as equity-linked or market-linked CDs.

Brokered CDs earn interest but the rate is not tied to a market index. Instead, the rate is fixed for the maturity term.

Brokered vs Bear CD

Bear CDs are the opposite of bull CDs. With this type of CD, interest is earned based on declines in the underlying market index. So in other words, you make money when the market falls.

Again, brokered CDs don’t work this way. There is no index correlation; returns are based on the interest rate assigned at the time the CD is issued.

Brokered vs Yankee CD

Yankee CDs are CDs issued by foreign banks in the U.S. market. So, for example, a Canadian bank that has a branch in New York might offer Yankee CDs to its U.S. customers. Yankee CDs are typically suited to higher net worth investors, as they may require $100,000 or more to open. Unlike brokered CDs, which have fixed rates, a Yankee CD may offer a fixed or floating rate.

Are Brokered CDs FDIC Insured?

Brokered CDs are generally FDIC-insured if the bank issuing them is an FDIC member. The standard FDIC coverage limits apply. Currently, the FDIC insures banking customers up to $250,000 per depositor, per account ownership type, per financial institution. You have to be listed as the CD’s owner in order for the FDIC protection to kick in.

There is an exception if brokered CDs are classified as securities. In that case, you would have no FDIC protection. The FDIC does not consider money held in securities to be deposits and encourages consumers to understand where they’re putting their money so they know if they’re covered or not.

However, it’s possible that you may be covered by the Securities Investor Protection Corporation (SIPC) if a member brokerage or bank brokerage subsidiary you have accounts with fails.

Are Brokered CDs Better Than Bank CDs?

Brokered CDs do offer some advantages over bank CDs, in terms of flexibility, liquidity, and returns. You’re also free from withdrawal penalties with brokered certificates of deposit. You could, however, avoid this with a no-penalty CD.

What is a no-penalty CD? Simply, it’s a CD that allows you to withdraw money before maturity without an early withdrawal fee. Some banks offer no-penalty CDs, along with Raise Your Rate CDs and Add-On CDs to savers who want more than just a standard certificate of deposit account.

Here’s something else to keep in mind. You’ll typically need more money to invest in brokered CDs vs. bank CDs. And you’re taking more risk with your money, since brokered CDs are more susceptible to market risk, interest rate risk, and credit risk. Bank CDs, by comparison, are some of the safest places to keep your money and earn some interest in the bargain.

When to Consider Brokered CDs Over Bank CDs

You might choose a brokered CD over bank CDs if brokered certificates of deposit are offering competitive rates and you plan to hold the CD until maturity. Even if rates were to rise during the maturity period, you could still realize a gain when it’s time to cash the CD out.

Paying attention to interest rates can help you decide on the right time to invest in a brokered certificate of deposit. Also, consider the minimum investment and any fees you might pay to purchase the CD.

Recommended: Average Savings by Age

When to Consider Bank CDs Over Brokered CDs

You might consider bank CDs over brokered CDs if you’d prefer to take less risk with your money. When you put money into a CD, you’re virtually guaranteed to get it back, along with the interest earned. The only time you might lose money from a bank CD is if you cash it out early and have to pay an early withdrawal penalty.

Bank CDs may also be more attractive if you don’t want to tie up all your money in a single brokered CD. For example, instead of putting $10,000 into a single brokered certificate of deposit you might spread that out across five or six bank CDs with different maturity dates instead.

This is called CD laddering. Creating a CD ladder can create some flexibility, since it may be easier to avoid early withdrawal fees if a maturity date is always on the horizon. You could also use a CD ladder to capitalize on rising rates by rolling CDs over once they mature.

How to Buy a Brokered CD

If you’d like to buy a brokered CD, you’ll first need to find a brokerage that offers them. You can then open a brokerage account, which typically requires filling out some paperwork and verifying your ID. Most brokerages let you do this online to save time.

Once your account is open, you should be able to review the selection of brokered CDs available to decide which ones you want to purchase. When comparing brokered CDs, pay attention to:

•   Minimum deposit requirements

•   Maturity terms

•   Interest rates

•   Fees

Also, consider whether the CD is callable or non callable as that could potentially affect your returns.

The Takeaway

Brokered CDs offer some distinct advantages over regular bank CDs, if you have a larger sum of money to invest and you want a fairly safe place to put it. Brokered CDs are generally available through a brokerage firm, and because they require higher initial deposits (and sometimes a longer maturity period) these CDs often pay higher interest rates. Perhaps the biggest advantage to brokered CDs, though, is that you can access your money at any time by selling the CD on the secondary market. Of course, this could limit the returns you’d see if you kept your money in the CD. But some investors may want that flexibility.

If you’re committed to saving, and you want to earn more than the standard savings account (and more than many standard bank CDs!), you’ve come to the right place. SoFi offers a number of options for ways to grow your money while minimizing risk — including SoFi’s new all-in-one Checking and Savings. You can sign up for an account right from your phone and pay zero account fees — and if you qualify and sign up with direct deposit, you can earn a competitive APY.

FAQ

Can you lose money on a brokered CD?

It’s possible to lose money on a brokered CD if you sell it prior to maturity after interest rates have risen. Higher rates can cause the market price of brokered CDs to decline, meaning you could end up selling them for less than what you paid.

Are brokered CDs a good idea?

A brokered CD could be a good idea if you understand the risks involved. Brokered certificates of deposit can offer the potential to earn higher interest rates than regular CDs. But it’s also possible to lose money with this type of CD.

What is the difference between a brokered CD and a bank CD?

A brokered CD is issued by a bank and sold by a brokerage. Bank CDs are issued by banks and offered directly to their customers. Brokered CDs may have higher minimum deposit requirements and offer higher interest rates for savers.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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/Anchiy
SOBK0322031

A retirement money market account is similar to a savings account where the money is liquid and earns a low interest rate. But a retirement money market account is held within a retirement account such as an IRA or 401(k), and is subject to the benefits and restrictions of those accounts.

While you might have most of your money in higher-return investments, it may also make sense to keep some funds in a retirement money market account. A retirement money market account, like a standard money market account, is a relatively low-risk place to store cash. Even if the return is lower than other investments, it’s predictable.

Another reason to have a retirement money market account is a holding place as you sell investments or transfer money between investments. Here’s what else you need to know about retirement money market accounts.

Recommended: What is a Money Market Account

What Is a Retirement Money Market Account?

As the name suggests, a retirement money market account is a type of money market account that is held inside a retirement account. The money market account could be within a traditional, rollover, or Roth IRA, a 401(k), or other retirement account, which means those funds are governed by the rules of that account.

So the deposits you make may be tax deductible and may grow tax free, but depending on the type of retirement account you might not be able to withdraw funds before age 59 ½ without paying a penalty.

Money in the retirement money market account is liquid. It’s usually where money is held when you first transfer money into your retirement account, or when you sell other investments in your account. You can use the funds in the money market to purchase investments within the retirement account.

What Is a Money Market Fund?

Bear in mind an important distinction: A money market fund, which is technically a type of mutual fund, is different from a money market account. A money market fund is an investment that holds short-term securities (and is not FDIC insured). For example, these funds may hold government bonds, municipal bonds, corporate bonds, cash and cash equivalents.

A money market account is essentially a type of high-yield savings account and it’s FDIC insured up to $250,000.

How Does a Retirement Money Market Account Work?

If you are starting a retirement fund, you’ll want to make sure that you understand how retirement money market accounts work. One big difference from a regular money market account is that money in a retirement money market account is governed by a retirement plan agreement.

This can place some limits on what you can do with the money in a retirement money market account. Typically, that will mean that you can’t withdraw money held in your retirement money market account until you have reached a certain age. But one advantage is that the money in the account will grow tax-free or tax-deferred (depending on what type of retirement account it is in).

For example, a money market account in a Roth IRA would follow different rules than money in a 401(k).

•   You can deduct contributions to a 401(k), but a Roth IRA is funded with after-tax money.

•   You can’t withdraw money from a 401(k) until you’re 59 ½, except under special circumstances.

•   Because contributions to a Roth are post tax, you can withdraw your contributions at any time (but not the earnings).

Advantages of a Retirement Money Market Accounts

•   Money is typically insured by the FDIC up to $250,000.

•   Can store proceeds of the sales of stocks, bonds, or other investments.

•   Many retirement money market accounts offer the ability to write checks against the account.

Disadvantages of a Retirement Money Market Accounts

•   Pays a low interest rate that may not keep up with inflation.

•   Requires a separate retirement account.

•   May not be able to withdraw money until retirement age without paying a penalty.

Retirement Money Market Account vs Traditional Money Market Account

The biggest difference between a retirement money market account vs. a traditional money market account is where they are held. A retirement money market account is held inside a separate retirement account, such as a 401(k) or IRA account. A traditional money market account is usually held at a bank or credit union.

While you can access money in a traditional money market account at any time, you may not be able to access the money in a retirement money market account until you retire. It depends on the type of account.

Recommended: What is an IRA and How Does it Work?

How Does a Retirement Money Market Account Differ From an IRA Account?

While you might think of an IRA as a type of investment account, it may be more accurate to think of an IRA as a collection of various types of investments. You can use your IRA to invest in stocks, bonds, options, real estate, cryptocurrency, and so on.

A retirement money market account is one type of investment that you can have in your IRA. Money in a retirement money market account inside your IRA, for example, can be used for daily living expenses in retirement or as a holding place as you move money between different types of other investments.

In terms of your asset allocation, funds in a money market are considered cash or cash equivalents. This can help balance your holdings that are more volatile.

What Should I Know Before Opening a Retirement Money Market Account?

If you are wondering how to save for retirement, there are a few things that you should know before opening a retirement money market account.

The most important is that money put into a retirement money market account is subject to the same conditions as any other money you invest into a retirement account. You generally will not be able to access it without penalty until you retire.

You also want to bear in mind that these are low-risk, low-return accounts. The money that you deposit, or money that is automatically transferred, is not going to provide much growth.

In some cases, a retirement account might come with a money market account within it, and funds may be automatically deposited there. In these instances, be sure to check that the money in that part of your account is then used to purchase the securities you want. Given the low yield of an MMA, you only want a certain portion of your savings to remain there.

Opening a Retirement Money Market Account

In most cases, you won’t open a retirement money market account separately, as you might with a traditional MMA.

Instead, you would open a retirement account with your bank or company provider. Depending on your IRA custodian, they may automatically include a retirement money market account as an investment option inside your IRA account.

Is a Retirement Money Market Account Right for You?

There are many different types of retirement plans, so you’ll want to make sure to choose the options that make the most sense for you. While it makes sense to have a retirement money market account inside your 401(k) or IRA, you might not want to put much money inside of it.

The reason for this is due to the relatively low interest rate that retirement money market accounts pay. In most cases, the interest rate will be lower than the rate of inflation, so money kept inside of a retirement money market account will lose purchasing power each year.

The one exception to this rule would be retirees who are currently living off of the money in their retirement accounts. These investors already in retirement will often want to keep some of their money in money market accounts so they have to worry less about market volatility.

Alternatives to Retirement Money Market Accounts

There are any number of low-risk alternatives to retirement money market accounts, including vehicles outside a retirement account, such as a high-yield savings. For similar alternatives within a retirement account, you could consider investing in bonds, bond funds, and other options that might provide a steady return, but with a lower risk profile.

The Takeaway

A retirement money market account is similar to a savings account, but it is held inside a retirement account such as an IRA or 401(k). While a retirement money market account has the advantages of being FDIC-insured and fairly liquid, it also doesn’t pay very high interest rates. Most investors will want to keep the money in their retirement accounts in investments that provide higher rates of return, although one advantage of a retirement money market account is that it can become part of the low-risk, cash/cash equivalents part of your portfolio.

Money market accounts are just one option for a secure, steady rate of return. If you’re looking for great interest rates while having flexible access to your money, consider SoFi’s all-in-one high yield bank account. Eligible account holders can earn a competitive APY by signing up for direct deposit.

FAQ

What does a retirement money market account require?

A retirement money market account is a type of money market account that is held inside a retirement account, e.g. an IRA or 401(k). You’ll need to open up an IRA or other type of retirement account to have a retirement money market account. Most IRA custodians will include a money market retirement account as one investment option for your IRA.

What is the difference between an IRA and a money market account?

A standard money market account is a liquid investment similar to a savings account. An Individual Retirement Account (IRA) is a tax-deferred account that can be used to invest in a variety of different ways. A money market account inside of an IRA or other retirement account is typically referred to as a retirement money market account.

What is the difference between a money market account and a 401(k)?

A standard money market account is similar to a savings account in that the money is liquid and it pays a fixed rate of interest. A 401(k) is a tax-deferred account that acts as a vehicle for a wide range of investments. Contributions are deductible and the investor must pay taxes on withdrawals. A money market account is funded with after tax dollars, and there are no tax benefits associated with these accounts. A retirement money market account, however, obeys the rules of the retirement account it’s in.

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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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