What is IRS Form 1098?

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A Form 1098 is a tax document that reports amounts that may affect a tax filer’s adjustments to income or deductions from their income on their annual tax return. There are several variations of the form—some are used to report amounts paid and some are used to report charitable contributions made. Any of the forms a person may receive are important documents to refer to when completing annual income tax returns.

 

Related: The fastest ways to get your tax refund

Reasons for Getting a Form 1098

There are several variations of Form 1098. The standard form, Mortgage Interest Statement, is probably the one most people are familiar with. It reflects mortgage interest a borrower paid in a calendar year. If a borrower paid $600 or more in interest on a mortgage debt in a calendar year, they should receive a Form 1098 to use when completing their annual tax return. The form includes the amount of mortgage interest paid and any refund of overpaid interest, the outstanding mortgage balance, mortgage insurance premiums paid, and other amounts related to the mortgage loan.

1098-T vs. 1098-E

For those who have paid tuition to a college or university or who have paid interest on student loan debt, the Forms 1098-T and 1098-E may be familiar:

  • Form 1098-T, Tuition Statement, includes amounts of payments received by the school for qualified tuition and related expenses. It also includes amounts of scholarships and grants a student may have received, adjustments to those scholarships and grants, and other information.
  • Form 1098-E is a Student Loan Interest Statement. Lenders who receive interest payments of $600 or more from a student loan borrower in a calendar year must provide this form to the borrower. The form includes the amount of student loan interest paid by the borrower, the account number assigned by the lender, and other information.

Other Variations of Form 1098

  • Form 1098-C is connected with a very specific form of charitable giving. It shows any donation a tax filer made to a qualifying charity or non-profit of a car, truck, van, bus, boat or airplane worth more than $500 and that meets other requirements.
  • Form 1098-F shows any court-ordered fines, penalties, restitution or remediation a person has paid.
  • Form 1098-MA reflects mortgage assistance payments made by a State Housing Finance Agency (HFA) and mortgage payments made by the mortgage borrower, the homeowner.
  • Form 1098-Q is connected with a specific form of retirement-savings vehicle called a Qualifying Longevity Annuity Contract. This form is a statement showing the money the annuity holder received from such a contract over the course of a calendar year.

Using Form 1098 at Tax Time

For homeowners who are still paying mortgage payments, Form 1098-Mortgage Interest Statement is an important part of completing a tax return. A tax filer’s deductions depend on a number of specific factors, but there are some general rules to keep in mind when looking at Form 1098:

  • The debt must be secured by real property.
  • The real property that secures the debt must be a main or second home.
  • Mortgages taken out after Dec. 31, 2017, must total $750,000 or less. Those taken out before that date must total $1 million or less.
  • Separate forms will be provided for each qualifying mortgage.
  • It is necessary to itemize deductions on a tax return to claim the mortgage interest deduction.

The potential deduction of interest paid on student loans, shown on Form 1098-E, follows different rules. Notably, this deduction is an adjustment to a tax filer’s income, so it’s not necessary to itemize deductions:

  • The student loan interest deduction is limited to $2500 or the amount actually paid, whichever is less.
  • The deduction is gradually phased out at certain income levels. For tax year 2021, tax filers with a modified adjusted gross income of $85,000 or more ($170,000 or more if filing a joint return) cannot claim the deduction at all.

Form 1098-T provides information that will be useful for tax filers who qualify for education credits provided by the American Opportunity Credit or the Lifetime Learning Credit:

  • The American Opportunity Credit may be claimed by certain tax filers who paid qualified higher education expenses. To claim the credit, certain qualifications must be met, including income level, dependency status, the type of program the student is enrolled in, and the enrollment status of the student, among others. The maximum credit is $2500 per eligible student and may be claimed for only four tax years per eligible student.
  • The Lifetime Learning Credit may also be claimed by certain tax filers who paid qualified education expenses but has some differences from the American Opportunity Credit. The annual limit is $2000 per tax return (not per student). It’s not limited to college-related expenses—courses to acquire or improve job skills are also eligible. There is no limit on the number of years this credit can be claimed, and there is no minimum number of hours a student must be enrolled.

Both the American Opportunity Credit and the Lifetime Learning Credit have income phase-out levels. Like the student loan interest deduction provided by Form 1098-E, both of these credits are adjustments to income and don’t require a tax filer to itemize deductions.

The Takeaway

Any of the variations of Form 1098 contain important information for filing your 2021 taxes. They all include financial information that has the potential to affect the amount of money a tax filer may be able to deduct. For specific information about a tax situation, it’s recommended to talk to a tax professional. The information in this article is only intended to be an overview, not tax advice. Keeping up with finances is more than just a once-a-year tax filing.

 

Learn more:

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

 

SoFi Money
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA SIPC. Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank. SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
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.

 

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Top 10 must-know rules on 401(k) taxes

 

Employer-sponsored retirement plans like a 401(k) are a common way for workers to save for retirement. In any given year, about half of employees participate in a retirement plan at work, according to the Bureau of Labor Statistics. So it’s important for participants to understand how 401(k) taxes work.

With a traditional 401(k) plan, employees can contribute a portion of their salary to an account with a range of investment options, including stocks, bonds, mutual funds and cash.

Employers sometimes match part or all of these contributions. For instance, a company might match 50% of an employee’s contribution, up to 6% of the employee’s salary. In 2020 and 2021, participants can contribute up to $19,500 to a 401(k) plan, plus $6,500 if they’re 50 or older.

There are two main types of workplace 401(k) plans: a traditional plan and a Roth. Although Roth 401(k)s are a newer product on the market, they’re becoming increasingly popular. The rules on 401(k) taxes depend on which plan an employee participates in.

Related: A guide to tax-efficient investing

 

DepositPhotos.com

 

Employer-sponsored retirement plans like a 401(k) are a common way for workers to save for retirement. In any given year, about half of employees participate in a retirement plan at work, according to the Bureau of Labor Statistics. So it’s important for participants to understand how 401(k) taxes work.

With a traditional 401(k) plan, employees can contribute a portion of their salary to an account with a range of investment options, including stocks, bonds, mutual funds and cash.

Employers sometimes match part or all of these contributions. For instance, a company might match 50% of an employee’s contribution, up to 6% of the employee’s salary. In 2020 and 2021, participants can contribute up to $19,500 to a 401(k) plan, plus $6,500 if they’re 50 or older.

There are two main types of workplace 401(k) plans: a traditional plan and a Roth. Although Roth 401(k)s are a newer product on the market, they’re becoming increasingly popular. The rules on 401(k) taxes depend on which plan an employee participates in.

Related: A guide to tax-efficient investing

 

DepositPhotos.com

 

When it comes to this tried-and-true retirement savings plan, here are key things to know about 401(k) taxes and 401(k) withdrawal tax.

 

 

TimArbaev / istockphoto

 

When it comes to this tried-and-true retirement savings plan, here are key things to know about 401(k) taxes and 401(k) withdrawal tax.

 

 

TimArbaev / istockphoto

 

Your contributions to a 401(k) plan come from pretax income. If you’re contributing to your work 401(k), each time you are to receive a paycheck, a predetermined portion is deposited into your 401(k), and the rest is paid to you, less any taxes.

Because the money comes out of your paycheck before taxes, your paycheck will decrease by less than your total contribution.

How this might look:

  • Your gross salary: $50,000
  • Pay schedule: Every two weeks
  • State/local tax rate: 6%
  • Federal income tax rate: 22%

If you contribute 10% of your salary, $192 will be deducted from each paycheck (before taxes), but your take-home pay will decrease by only $138.

If you contribute 15% of your salary, $288 will be deducted from each paycheck (before taxes), but your take-home pay will decrease by only $208.

 

DepositPhotos.com

 

Your contributions to a 401(k) plan come from pretax income. If you’re contributing to your work 401(k), each time you are to receive a paycheck, a predetermined portion is deposited into your 401(k), and the rest is paid to you, less any taxes.

Because the money comes out of your paycheck before taxes, your paycheck will decrease by less than your total contribution.

How this might look:

  • Your gross salary: $50,000
  • Pay schedule: Every two weeks
  • State/local tax rate: 6%
  • Federal income tax rate: 22%

If you contribute 10% of your salary, $192 will be deducted from each paycheck (before taxes), but your take-home pay will decrease by only $138.

If you contribute 15% of your salary, $288 will be deducted from each paycheck (before taxes), but your take-home pay will decrease by only $208.

 

DepositPhotos.com

 

The more you contribute to a 401(k) account, the lower your taxable income is in that year. If you contribute 15% of your income to your 401(k), for instance, you’ll only owe taxes on 85% of income.

How this might look:

  • Your gross salary: $50,000
  • State/local tax rate: 6%
  • Federal income tax rate: 22%

If you contribute 0% of your salary annually, you’ll pay taxes on the full $50,000.

If you contribute 10% of your salary annually, $5,000 will be deposited into your 401(k) account and you will be taxed on $45,000. Total tax savings: $1,400.

If you contribute 15% of your salary annually, $7,500 will be deposited into your 401(k) account and you will be taxed on $42,500. Total tax savings: $2,100.

 

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The more you contribute to a 401(k) account, the lower your taxable income is in that year. If you contribute 15% of your income to your 401(k), for instance, you’ll only owe taxes on 85% of income.

How this might look:

  • Your gross salary: $50,000
  • State/local tax rate: 6%
  • Federal income tax rate: 22%

If you contribute 0% of your salary annually, you’ll pay taxes on the full $50,000.

If you contribute 10% of your salary annually, $5,000 will be deposited into your 401(k) account and you will be taxed on $45,000. Total tax savings: $1,400.

If you contribute 15% of your salary annually, $7,500 will be deposited into your 401(k) account and you will be taxed on $42,500. Total tax savings: $2,100.

 

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When you take withdrawals from your 401(k) account in retirement, you’ll be taxed on both your contributions and any earnings that have accrued over time.

The withdrawals count as taxable income, so you will owe taxes in your retirement income tax bracket.

 

Depositphotos

 

When you take withdrawals from your 401(k) account in retirement, you’ll be taxed on both your contributions and any earnings that have accrued over time.

The withdrawals count as taxable income, so you will owe taxes in your retirement income tax bracket.

 

Depositphotos

 

If you withdraw money from your 401(k) before age 59-and-a-half, you’ll owe both income taxes and a 10% tax penalty on the distribution.

Although IRAs allow penalty-free early withdrawals for qualified first-time homebuyers and for qualified higher education expenses, that is not true for 401(k) plans.

That said, if an employee leaves a company during or after the year in which they turn 55, they can start taking distributions from their 401(k) account without paying taxes or penalties.

Can you take out a loan or hardship withdrawal from your plan assets? Many plans do allow that, up to a certain amount, but withdrawing money from a retirement account means you lose out on the compound growth from funds withdrawn.

You will have to pay interest (yes, to yourself) on the loan.

 

DepositPhotos.com

 

If you withdraw money from your 401(k) before age 59-and-a-half, you’ll owe both income taxes and a 10% tax penalty on the distribution.

Although IRAs allow penalty-free early withdrawals for qualified first-time homebuyers and for qualified higher education expenses, that is not true for 401(k) plans.

That said, if an employee leaves a company during or after the year in which they turn 55, they can start taking distributions from their 401(k) account without paying taxes or penalties.

Can you take out a loan or hardship withdrawal from your plan assets? Many plans do allow that, up to a certain amount, but withdrawing money from a retirement account means you lose out on the compound growth from funds withdrawn.

You will have to pay interest (yes, to yourself) on the loan.

 

DepositPhotos.com

 

Here are some tax rules about the newer retirement savings vehicle, the Roth 401(k).

 

 

nevarpp / istockphoto

 

Here are some tax rules about the newer retirement savings vehicle, the Roth 401(k).

 

 

nevarpp / istockphoto

 

A Roth 401(k) works in the opposite way, tax-wise, from a traditional 401(k). Your contributions are post-tax, meaning you pay taxes on the money in the year in which you contribute it.

 

 

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A Roth 401(k) works in the opposite way, tax-wise, from a traditional 401(k). Your contributions are post-tax, meaning you pay taxes on the money in the year in which you contribute it.

 

 

franckreporter

 

Although part of your paycheck will be deposited into a Roth 401(k), you’ll be taxed as though you received the entire amount. For instance, if you’re making $50,000 and contributing 10% to a Roth 401(k), $5,000 will be deposited into your Roth 401(k) annually, but you’ll still be taxed on the full $50,000.

 

 

DepositPhotos.com

 

Although part of your paycheck will be deposited into a Roth 401(k), you’ll be taxed as though you received the entire amount. For instance, if you’re making $50,000 and contributing 10% to a Roth 401(k), $5,000 will be deposited into your Roth 401(k) annually, but you’ll still be taxed on the full $50,000.

 

 

DepositPhotos.com

 

When you take money from your Roth 401(k) in retirement, the distributions are tax-free, including your contributions and any earnings that have accrued (as long as the five-year rule is met, explained in No. 8).

No matter what your tax bracket is in retirement, qualified withdrawals from your Roth 401(k) won’t affect your taxable income.

 

Helloquence

 

When you take money from your Roth 401(k) in retirement, the distributions are tax-free, including your contributions and any earnings that have accrued (as long as the five-year rule is met, explained in No. 8).

No matter what your tax bracket is in retirement, qualified withdrawals from your Roth 401(k) won’t affect your taxable income.

 

Helloquence

 

In order for a withdrawal from a Roth 401(k) to count as a qualified distribution (i.e., no taxes), an employee must be at least age 59-and-a-half and have held the account for at least five years.

If you make a withdrawal before this point — even if you’re age 61 but have only held the account since age 58 — the withdrawal would be considered an early, or unqualified, withdrawal. If this happens, you would owe taxes on any earnings you withdraw and could pay a 10% penalty.

Early withdrawals are prorated according to the ratio of contributions to earnings in the account. For instance, if your Roth 401(k) had $100,000 in it, made up of $70,000 in contributions and $30,000 in earnings, your early withdrawals would be made up of 70% contributions and 30% earnings. Hence, you would owe taxes and potentially penalties on 30% of your early withdrawal.

If the plan allows it, you can take a loan from your Roth 401(k), just like a traditional 401(k), and the same rules and limits apply to how much you can borrow. Any Roth 401(k) loan amount will be combined with outstanding loans from that plan or any other plan your employer maintains to determine your loan limits.

 

DepositPhotos.com

 

In order for a withdrawal from a Roth 401(k) to count as a qualified distribution (i.e., no taxes), an employee must be at least age 59-and-a-half and have held the account for at least five years.

If you make a withdrawal before this point — even if you’re age 61 but have only held the account since age 58 — the withdrawal would be considered an early, or unqualified, withdrawal. If this happens, you would owe taxes on any earnings you withdraw and could pay a 10% penalty.

Early withdrawals are prorated according to the ratio of contributions to earnings in the account. For instance, if your Roth 401(k) had $100,000 in it, made up of $70,000 in contributions and $30,000 in earnings, your early withdrawals would be made up of 70% contributions and 30% earnings. Hence, you would owe taxes and potentially penalties on 30% of your early withdrawal.

If the plan allows it, you can take a loan from your Roth 401(k), just like a traditional 401(k), and the same rules and limits apply to how much you can borrow. Any Roth 401(k) loan amount will be combined with outstanding loans from that plan or any other plan your employer maintains to determine your loan limits.

 

DepositPhotos.com

 

Anyone who’s earning income can set up an individual retirement account. With a traditional IRA, investments in the account grow tax-deferred. A Roth IRA is funded with after-tax dollars, as is an employer-sponsored Roth 401(k) account.

Money in a Roth 401(k) account can be rolled into a Roth IRA.

One of the big differences between a Roth 401(k) and Roth IRA is that the 401(k) requires participants to start taking required minimum distributions at age 72, but there is no such requirement for a Roth IRA.

It’s important to note, however, that there’s also a five-year rule for Roth IRAs: Earnings cannot be withdrawn sans taxes and penalty from a Roth IRA until five years after the account’s first contribution. If you roll a Roth 401(k) into a new Roth IRA, the five-year clock starts then.

If you already have a Roth IRA established with contributions, the clock starts from the date of your first contribution to it.

If you’re thinking of establishing a Roth IRA in order to roll over your account in five years, keep in mind that you must meet income requirements to contribute to a Roth IRA.

 

alfexe

 

Anyone who’s earning income can set up an individual retirement account. With a traditional IRA, investments in the account grow tax-deferred. A Roth IRA is funded with after-tax dollars, as is an employer-sponsored Roth 401(k) account.

Money in a Roth 401(k) account can be rolled into a Roth IRA.

One of the big differences between a Roth 401(k) and Roth IRA is that the 401(k) requires participants to start taking required minimum distributions at age 72, but there is no such requirement for a Roth IRA.

It’s important to note, however, that there’s also a five-year rule for Roth IRAs: Earnings cannot be withdrawn sans taxes and penalty from a Roth IRA until five years after the account’s first contribution. If you roll a Roth 401(k) into a new Roth IRA, the five-year clock starts then.

If you already have a Roth IRA established with contributions, the clock starts from the date of your first contribution to it.

If you’re thinking of establishing a Roth IRA in order to roll over your account in five years, keep in mind that you must meet income requirements to contribute to a Roth IRA.

 

alfexe

 

If you have a Roth 401(k) and your company offers a 401(k) match, that matching contribution must go into a pretax account, which would be a traditional 401(k) account.

 

 

DepositPhotos.com

 

If you have a Roth 401(k) and your company offers a 401(k) match, that matching contribution must go into a pretax account, which would be a traditional 401(k) account.

 

 

DepositPhotos.com

 

Understanding 401(k) tax rules and 401(k) tax benefits puts you in a position to take steps to minimize taxes overall. Here are some things to consider:

Your tax bracket: Contributing to a traditional 401(k) is essentially a bet that you’ll be in a lower tax bracket in retirement — you’re choosing to forgo taxes now and pay taxes later. Contributing to a Roth 401(k) takes the opposite approach: Pay taxes now so you don’t have to pay taxes later. The best approach for you will depend on your income, your tax situation, and your expectations for your tax treatment in the future.

Your account mix: Having savings in different types of accounts—  both pre-tax and post-tax—  may offer more flexibility in retirement. For instance, if you need to make a large purchase, such as a vacation home or a car, it’s sometimes helpful to be able to pull the income from a source that doesn’t trigger a taxable event. This might mean a retirement strategy that includes a traditional 401(k), a Roth IRA, and a taxable brokerage account.

Your living plans: Seven U.S. states don’t charge individual income taxes at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. And Tennessee and New Hampshire only tax interest and dividend income. This can affect your tax planning if you live in a tax-free state now or if you intend to live in a tax-free state in retirement.

Learn more:

This article
originally appeared on 
SoFi.com and was
syndicated by
MediaFeed.org.

SoFi Invest
The information provided is not meant to provide investment or financial advice. 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  . The umbrella term “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) Digital Assets—The Digital Assets platform is owned 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, http://www.sofi.com/legal.
Stock Bits
Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

 

DepositPhotos.com

 

Understanding 401(k) tax rules and 401(k) tax benefits puts you in a position to take steps to minimize taxes overall. Here are some things to consider:

Your tax bracket: Contributing to a traditional 401(k) is essentially a bet that you’ll be in a lower tax bracket in retirement — you’re choosing to forgo taxes now and pay taxes later. Contributing to a Roth 401(k) takes the opposite approach: Pay taxes now so you don’t have to pay taxes later. The best approach for you will depend on your income, your tax situation, and your expectations for your tax treatment in the future.

Your account mix: Having savings in different types of accounts—  both pre-tax and post-tax—  may offer more flexibility in retirement. For instance, if you need to make a large purchase, such as a vacation home or a car, it’s sometimes helpful to be able to pull the income from a source that doesn’t trigger a taxable event. This might mean a retirement strategy that includes a traditional 401(k), a Roth IRA, and a taxable brokerage account.

Your living plans: Seven U.S. states don’t charge individual income taxes at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. And Tennessee and New Hampshire only tax interest and dividend income. This can affect your tax planning if you live in a tax-free state now or if you intend to live in a tax-free state in retirement.

Learn more:

This article
originally appeared on 
SoFi.com and was
syndicated by
MediaFeed.org.

SoFi Invest
The information provided is not meant to provide investment or financial advice. 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  . The umbrella term “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) Digital Assets—The Digital Assets platform is owned 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, http://www.sofi.com/legal.
Stock Bits
Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

 

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