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Direct deposit

Direct deposit is a kind of electronic fund transfer in which institutions -- such as the IRS, the Social Security Administration, or your employer -- transfer payments they owe you directly to an account or accounts you specify.

Expanded Definition

Direct deposit allows institutions to deposit money they owe you directly into your bank account. It is especially useful for regular, recurring payments.

It has many advantages over paper checks, for both you and the institution:

  • It saves you a trip to the bank to make the deposit, enabling you to access your money more quickly. If the scheduled paydate falls on a holiday, direct deposit often makes your money available the day prior. If something unexpected happens, or you are ill or out of town, your money still gets deposited -- helping prevent bounced checks.
  • You can set up direct deposit so that it channels money into more than one account, including a savings account or brokerage account. Set up this way, direct deposit can help you save and invest money by automating the process.
  • Direct deposit is more secure than the mail and provides fewer opportunities for theft or loss.
  • Direct deposit is more easily traceable, so that the rare errors can be fixed more quickly.

Direct deposit can be arranged for most financial distributions, including payroll, tax returns, Social Security payments, pensions, annuities, IRAs, and 401(k)s.

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