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What is direct deposit?

Key takeaways

  • Direct deposit allows you to receive a payment directly into a single or multiple bank or investment accounts—no paper checks involved.
  • It's commonly used for work pay, employer reimbursements, tax refunds, unemployment benefits, child support payments, and Social Security benefits.
  • Direct deposit benefits include convenience, speed (no holding periods like depositing paper checks may require), and relative security.
  • Some cons: It takes a little work on the front end to get it set up, and you need to start over if you want to change the account your money direct deposits into.

Going to the bank to deposit paychecks can be a hassle. Even uploading paycheck pictures to a bank app isn’t as simple as direct deposit, which automatically puts your pay straight into the account of your choosing. You can also use direct deposit to receive tax refunds, child support payments, unemployment benefits, stimulus checks, and Social Security payments. Let’s take a closer look at how direct deposit works—and how you can use it to get your money faster.

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What is direct deposit?

A direct deposit is an automatic payment that goes straight into a bank account, investment account, or onto a prepaid debit card if you don’t have one of those accounts. Your employer may offer to direct deposit your paycheck into multiple accounts. This could allow you to split your paycheck between, say, a checking account and an investment account.

According to a 2023 survey by PayrollOrg, more than 95% of US employees are paid via direct deposit.1 The IRS also recommends that taxpayers choose this method for quicker tax refunds. And federal law actually requires that federal benefits, such as Social Security benefits, be paid by direct deposit or onto a debit card.

How does direct deposit work?

Direct deposit works by having a payer, like an employer or the government, send money to an account specified by the recipient, such as a checking account or investment account. Payers do this through something called the Automated Clearing House (ACH). This is a nationwide network that financial institutions use to transfer money electronically. Direct deposits are routed and processed by 2 national ACH operators, one of which falls under the Federal Reserve. Here’s how it happens.

  • The ACH operator receives files of ACH payments
  • Payments are edited and sorted
  • The ACH operator delivers the payments to receiving financial institutions and settles the transactions

How long does direct deposit take?

Direct deposit can take 1 to 3 days to hit your account or debit card, but the timing can vary, depending on the institution holding your account, who’s issuing the payment, and what kind of payment it is. In some cases, you could get access to your work paycheck from your bank account up to 2 days before the actual payday, according to national credit bureau Experian. In other cases, direct deposit paychecks become available in your bank account 1 business day after payday. For unemployment benefits, your money may show up in your account within a few business days after filing a claim. And for a tax refund, if you file electronically, you’ll likely receive your refund via direct deposit within 3 weeks. In any of these cases, once funds are in your account and verified, you can withdraw that money.

Advantages of direct deposit

Here are some potential perks of enrolling in direct deposit.

Relative security

Direct deposit is generally a safe way to receive your money. There’s no risk of lost or stolen checks, which could lead to identity theft. Scammers can’t change paper check details to take your money because there are no paper checks. But there is some risk to having money direct deposited onto a prepaid debit card because it can get lost or stolen.

Convenience

Once your direct deposit is set up, you typically don’t need to do anything else (unless you want to change the receiving account). And there’s no need to run to the bank to deposit checks or wait for your funds to clear. Your payments come through automatically.

Speed

You can expect your money to hit your account on your payday or possibly a day earlier in some cases.

Potential to streamline investing

You could possibly automatically contribute money to a brokerage account, retirement account, or cash management account every payday. In some cases, you can have the cash automatically invested for you, but you might need to separately set up recurring investments in addition to setting up direct deposit.

Sustainability

Since direct deposit is paperless, there’s less environmental waste.

Possible bank fee elimination

If your bank charges a monthly maintenance fee, you may be able to avoid it if you have a certain amount of money direct deposited each month.

Disadvantages of direct deposit

Like anything else, direct deposit could have some downsides.

Cybersecurity risks

Financial institutions are constantly monitoring for fraud. While this is more a privacy and account compromise issue (and not a direct deposit transaction risk), it’s possible for a sophisticated scammer to divert direct deposit funds into their account instead of yours—if you give them access. To minimize that risk, keep your personal information safe and beware of phishing emails, which trick you into giving cyber-criminals access to your details.

Enrollment setup

You’ll have to manually enroll in direct deposit, and it may take a pay cycle or two to kick in. If you change which account you want money directed to, you’ll have to reset your details.

You need an account to direct deposit into if you don’t want a prepaid debit card

If you don’t have an account, like a savings, checking, or cash management account, but want direct deposited paychecks, you’d have to set one up. Luckily, there’s a wide range of accounts and financial institutions that accept direct deposit. (Psst … Fidelity’s cash management account accepts direct deposits and offers competitive rates on the money you keep in it.)

Direct deposit vs. wire transfer

A wire transfer is a different kind of electronic payment. Here are the main differences.

  • Direct deposits typically come from an employer or government agency; a wire transfer can also be between 2 individuals.
  • Direct deposit generally is free, but wire transfers may come with a fee.
  • Direct deposit is usually for regular, recurring payments, like work earnings and Social Security benefits (although you can receive one-time tax refunds via direct deposit). Wire transfers tend to be for one-off transactions.

How to set up direct deposit

For direct depositing work earnings, follow these instructions.

How to set up direct deposit at Fidelity Investments

  • Go to the direct deposit screenLog In Required and log into your account.
  • From the dropdown menu, choose which account you’d like to deposit your payments into (only eligible accounts will be shown).
  • Decide if you’d like to set up direct deposit through an automatic or manual process.
  • If you choose to set up your direct deposit automatically, you’ll need to search for your company or payroll provider from the list of presented options. Then you’ll see company-specific instructions to set up direct deposit. Note: You may have to provide your payroll ID and password (and you may have to ask your payroll department for this information).
  • Fidelity’s direct deposit administrator will relay your account and routing number to your employer.
  • If you opt for the manual process, see the bank instructions.

You can make changes to your direct deposit details online at any time. To stop direct deposit, notify your payroll department.

How to set up direct deposit at a bank or manually

  • Get a direct deposit form from your payroll department.
  • Fill it out with the required details. They will likely include:
    • Your account number
    • Your routing number, which is a 9-digit number that identifies a bank or financial institution. You can find this number at the bottom of your paper checks or on your financial institution’s website or app. This number is available on Fidelity.com on Portfolio Summary with an account in context or on the account and routing information pageLog In Required
  • You may need to provide a voided check, or copy of a recent statement if requested.
  • If you’re allowed to split the deposit between multiple accounts, make sure you have the account numbers and routing numbers for each one. Then determine how much you want to deposit into each account.
  • Submit the form to payroll.

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1. "Getting Paid in America," Payroll.org, 2023

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