Growing Wealth Archives

Dec

2025

Guide to What Percentage of Income to Save

By Kim Franke-Folstad | Budgeting & Goals, Growing Wealth, Life & Career | No Comments

If you want to build financial security and hit your long-term savings goals, it’s probably a wise move to put a portion of each paycheck into a savings account.

Most people agree that saving is important, but it can be challenging to know how much to stash away. Some people save 10% of their take-home pay, others three or four times that amount. Still others deposit a round number (be it $50, $500, or $5,000), into their savings account on a regular basis.

How much you should save depends upon a variety of factors, including your personal style and financial aspirations. In this guide, you’ll learn how to determine how much to save, plus hear smart advice on how to prioritize and reach your goals.

Key Points

• A popular guideline recommends saving 20% of your after-tax income, adjustable to individual circumstances.

• The 50/30/20 budget rule allocates 50% to essentials, 30% to discretionary spending, and 20% to savings and debt.

• Four types of savings are important: emergency fund, retirement, short-term goals, and long-term goals.

• Saving a fixed percentage ensures consistency and protects against lifestyle creep, though it can be challenging with fluctuating income.

• Budgeting and goal-setting are crucial for managing expenses, preventing impulse spending, and tracking financial progress.

What Percent of Your Income Should You Save?

There isn’t a set percentage of how much of your annual income you should save. Much will depend on your particular circumstances. For example, your income, your cost of living, your expenses, and your debt level will all matter. A person who earns $75K per year, lives in an expensive city, has student loans to pay off, and is supporting a family of four will likely find it more difficult to save money than someone who is earning $125K, lives in a less pricey location, has zero loans to pay down, and is single with no dependents.

That said, you are likely to hear that 20% is a good number to aim for in terms of the percentage of your income to be saved. If that proves too high, then 10% is a good figure to use as a goal.

Pros and Cons of Saving a Fixed Percentage of Your Income

Sure, saving money is important. But what about saving a percentage vs. a specific dollar amount?

There are pluses and minuses to saving a fixed percentage of your income. This approach may or may not work for everyone. Consider the upsides first:

• It’s consistent. You know that every paycheck, the percentage you’ve indicated will be heading into savings, helping you reach your financial goals. Even if your earnings vary, your savings will be aligned.

• It protects you against lifestyle creep. If, say, you are saving $500 per pay period and then get a raise, you might just spend all of that additional cash you are earning. Called lifestyle creep, that means your expenses rise, gobbling up your enhanced income.

When, however, you set a percentage to go into savings from your checking account or other source, you know that the amount will automatically adjust with any income fluctuations. For instance, if your pay varies depending on your hours or goals achieved, you will always be allocating the same ratio of your money to savings, whether you earn more or less.

But there are potential downsides to consider too.

• It may feel more challenging to know how much you’re socking away when you determine a percentage of income to save. Again, if you allocate $500 a month to savings rather than a percentage, it’s easy to calculate where you stand at any moment during the year.

• The way a percentage automatically adjusts to income changes may not suit you. For example, if you are saving 20% of your salary and then get a $10K raise, the amount funneled into savings will rise correspondingly. But what if you wanted to earmark that money to pay down your credit card debt more quickly? You will have to take steps to adjust where your money goes.

The 50/30/20 Rule

If you’re wondering, “What percent of my income should I save?” the 20% figure is likely to crop up often. One reason: the 50/30/20 budgeting rule, which was made popular by Sen. Elizabeth Warren and her daughter, Amelia Warren Tyagi, in a book they co-wrote. It suggests savers should allocate their money as follows:

• 50% of their after-tax paychecks toward essentials like housing, food, healthcare, and minimum debt payments.

• 30% toward discretionary spending

• 20% toward savings

So, someone who takes home $3,000 every two weeks (or $78k per year) might put $1,200 a month into savings. They would have $15,600 at the end of the year.

That’s just a guideline for getting started, though, so don’t panic if putting 20% into savings seems impossible right now. You can start at 10% or bump it up to 30% or more.

Recommended: 50/30/20 Calculator

It All Starts With a Budget

Making a budget may sound boring or even arduous, but it doesn’t have to be either. And sticking to a realistic spending plan can make or break a savings plan.

By prioritizing monthly expenses — from keeping a roof over your head to gassing up the car to indulging in a gelato or good sushi every Friday — you may be able to avoid impulse spending and hold on to more of your hard-earned dollars.

You can track your spending manually with a notebook or spreadsheets, or keep the data in the palm of your hand with a money-tracking app, where you can see your expenses, savings, and earnings all in one place whenever you want to take a peek.

4 Different Types of Savings

Once you determine what percentage you’ll be able to save from your salary, you may want to break down that amount even further, into separate designated “buckets” or sub-accounts for different goals, which could include things like:

1. Emergency Fund

An emergency fund has the potential to turn life’s potholes into speed bumps.

It’s money you can use to pay for unexpected expenses, such as medical bills, home repairs, and fender benders. And your emergency fund might serve as a lifeline if you lose your job and don’t have another source of income.

A good rule of thumb is to save at least three months’ salary, but you don’t have to come up with those dollars all at once.

You could start by saving a small amount each month — and you can always add to the fund when you get a raise, bonus, tax refund, or other money windfall. (You also should be prepared to replenish the fund if you have to use all or part of it at any point.)

The money in your emergency fund could go into a savings account at your local branch bank, or you might want to check out the benefits of an online bank account which might offer no account fees and a solid interest rate.

2. Short-Term Goals

Most of us have goals we hope to fund in the next few months or couple of years. This could be anything from throwing your significant other a memorable birthday party to booking that vacation to Positano to affording a new car. You can start your own short-term fund at your financial institution. You can label the account “holiday spending” or earmark it for any other short-term goal: “Fall Wardrobe,” “Beach Vacation,” or maybe a “New Laptop.”

You may want to automate your savings and have money whisked from your checking as soon as your paycheck hits.

3. Long-Term Goals

Setting aside money for a long-term goal — a down payment on a house, a honeymoon in Bali, a year in Paris with your bestie — can feel like a slow slog. But you may improve your chances for success if you set up an account for the money and designate a consistent amount to slip in there from every paycheck.

Depending on your timeline, you may want to check into a certificate of deposit (CD), or you could stick with that same high-interest savings account, which you can build with automatic deposits and link to other accounts with a tracking app. These are secure ways to save towards future goals.

4. Retirement Savings

Another aspect of how much of your annual income you should save involves preparing for retirement. If you have a 401(k) investment savings account available through your employer, you’re likely already building wealth for retirement with automatic contributions every payday. And if your employer offers any type of matching contribution, you have an opportunity to grow your money even faster.

Beyond that, it’s up to you how big of a slice of your savings pie you want to put toward retirement at any time.

If you’re just starting out, and especially if you have some debts to pay off, saving for retirement may seem like the least of your worries. But the earlier you start putting money away, the faster it can grow. Time is the investor’s true friend; it allows you to ride the ups and downs of the market without panicking as you work toward your goals. (Remember, investments aren’t insured, so you need to be aware of the risk involved.)

If you don’t have an employer-sponsored plan — or even if you do, but you want more investment options or maybe more help than you’ve been getting — you can open your own traditional or Roth IRA outside of work. When considering which type of retirement account to open, IRA or 401(k), you might want to keep an eye on what fees might be associated with each plan.

It’s important to note that employer-sponsored plans allow investors to contribute more annually than an IRA would. With a 401(k), you can contribute up to $23,500 in 2025 ($24,500 in 2026) if you’re under age 50, while an IRA caps contributions at $7,000 in 2025 ($7,500 in 2026) for those under 50.

Deciding on Your Goals

Goals are a good thing: They can provide motivation for saving. But they can’t just hang out there; they probably need some prioritizing. That doesn’t mean that you are picking just one to focus on. More likely, you are going to decide how to divvy up that percentage of your income that goes into savings.

Say you are committed to saving 20% of your income. You may want to determine percentages for:

• Retirement

• Your child’s college education

• A down payment on a house

One person might split that as 10%, 5%, and 5%. Another might instead do 8%, 2% and 10%. It depends on your particular goals, how else you might finance them (perhaps you expect your child to take out student loans), and the urgency of each.

Setting a Timeline

Some goals will be easy to plot on a timeline. For example, if your wedding is in a year and you’re saving $6,000 for your honeymoon, you’ll need to save $500 a month.

Others goals will likely need more finessing. (The amount you might need for retirement, for example, can be tough to pin down.) Could you drive your old car for another year or two, thereby saving money daily, if it meant getting a house sooner? Should you work another year before taking time off to be a stay-at-home parent? Only you can make those choices.

Deciding how much money you’ll need when you’ll need it, and how long it will take to save it may seem daunting as you start toward each new goal. But it also can help you stay motivated to note when you’re making headway. And you might even find new ways to cut expenses as you go.

Pay Off Debt

The average American had almost $8,000 in high-interest credit card debt as of the end of 2022. In addition, many people are also shouldering other debts, such as car loans and student loans.

If you’re a part of those statistics, paying off those debts could be the most important part of your saving plan.

• Any debt on which you’re paying interest can feel painful. But if you’ve missed some credit card payments and you’re paying the default rate (almost 30% in mid-2025), you’re likely putting an awful lot of money toward your past instead of toward your future.

• High-interest debt can drag you down, so it’s important to ditch it as quickly as possible. A personal debt reduction plan, like the debt avalanche, debt snowball, or the hybrid debt fireball, can help you pay off high-interest debt in a way that can build momentum and keep you motivated.

Here’s how the debt fireball method works:

1. Categorize your debts as either “good” or “bad.” (“Good” debts are generally lower-interest and involve things that have potential to increase your net worth, like student loans or a mortgage. “Bad” debt is usually considered to be higher-interest and incurred for a depreciating asset, like car loans and credit card debt.)

2. List your “bad” debts from smallest to largest based on their outstanding balances.

3. Make the minimum monthly payment on all outstanding debts, then funnel any excess funds to the smallest of your “bad” debts.

4. When that balance is paid in full, go on to the next smallest on the bad-debt list. Blaze through those balances until all your “bad” debt is repaid.

5. When that’s done, keep paying off your debt on the normal schedule while also putting more into various savings strategies that will help get you to your goals.

Remaining Flexible

Consistency can be a key to successful saving. Otherwise, it’s just too darn easy to let yourself off the hook from paycheck to paycheck, month to month, and year to year. But that doesn’t mean your savings plan has to feel like a forced march.

Flexibility is also important. A savings plan that seems smart and doable today may feel like torture six months from now. Or you might get a raise and decide you could be socking away much more.

Life changes. So it makes sense to tighten and lighten your budget — and the savings aspect you build into that budget — as necessary. If you’re tracking your expenses regularly, you may be better able to gauge how you’re doing and make any course corrections that much more quickly.

Anything Saved Is Better Than Nothing

It can feel discouraging when you get started on a long-term savings plan. Say you want to accumulate $60,000 for a down payment on a house. Perhaps saving 20% of your paycheck is impossible right now. And putting a couple of hundred dollars as a start can feel as if you will never reach your goal.

But over time, that little bit of money regularly contributed will indeed grow and propel you ever closer to your goal. Getting in the habit of contributing frequently can be a goal in and of itself, even if the amount is not as high as you’d like.

You may have also had this experience with shorter-term goals, such as building an emergency fund. Even if you only start by contributing $20, you will eventually reach your aim with steady saving.

The Takeaway

If you’re ready to start on the path to achieving a savings goal, look for a financial partner that minimizes fees and maximizes interest, to help your money work harder.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

Is it good to save 50% of your income?

It’s a wise move to save a portion of your paycheck, and 20% is an often-quoted figure to aim for. Fifty percent may be too high for many people, but if you can afford to save half of your take-home pay, you may get to your savings goals that much more quickly.

Is 20% of your income enough to save?

Many financial experts recommend saving 20% of your income or more if you can. The 20% figure is part of the popular 50/30/20 budget rule. However, some people may want to save more if possible, especially if they have a couple of major long-term goals they are saving for, such as buying a home, saving for their children’s education, and affording an early retirement.

What is the 60/20/20 rule?

The 60/20/20 rule is similar to the 50/30/20 budget guideline. In this case, it means that a person allocates 60% of their take-home pay to necessities, 20% to discretionary spending, and 20% to savings.

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Dec

2025

Guide to Cash Balance Pension Plans

By Rebecca Lake | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A cash balance pension plan is a defined benefit plan that offers employees a stated amount at retirement. The amount of money an employee receives can be determined by their years of service with the company and their salary. Employers may offer a cash balance retirement plan alongside a 401(k) or in place of one.

If you have a cash balance plan at work, it’s important to know how to make the most of it when preparing for retirement. Read on to learn more about what a cash balance pension plan is and the pros and cons.

What Are Cash Balance Pension Plans?

A cash balance pension plan is a defined benefit plan that incorporates certain features of defined contribution plans. Defined benefit plans offer employees a certain amount of money in retirement, based on the number of years they work for a particular employer and their highest earnings. Defined contribution plans, on the other hand, offer a benefit that’s based on employee contributions and employer matching contributions, if those are offered.

In a cash balance plan, the benefit amount is determined based on a formula that uses pay and interest credits. This is characteristic of many employer-sponsored pension plans. Once an employee retires, they can receive the benefit defined by the plan in a lump sum payment.

This lump sum can be rolled over into an individual retirement account (IRA) or another employer’s plan if the employee is changing jobs, rather than retiring. Alternatively, the plan may offer the option to receive payments as an annuity based on their account balance.

How Cash Balance Pension Plans Work

Cash balance pension plans are qualified retirement plans, meaning they’re employer-sponsored and eligible for preferential tax treatment under the Internal Revenue Code. In a typical cash balance retirement plan arrangement, each employee has an account that’s funded by contributions from the employer. There are two types of contributions:

• Pay credit: This is a set percentage of the employee’s compensation that’s paid into the account each year.

• Interest credit: This is an interest payment that’s paid out based on an underlying index rate, which may be fixed or variable.

Fluctuations in the value of a cash pension plan’s investments don’t affect the amount of benefits paid out to employees. This means that only the employer bears the investment risk.

Here’s an example of how a cash balance pension works: Say you have a cash balance retirement plan at work. Your employer offers a 5% annual pay credit. If you make $120,000 a year, this credit would be worth $6,000 a year. The plan also earns an interest credit of 5% a year, which is a fixed rate.

Your account balance would increase year over year, based on the underlying pay credits and interest credits posted to the account. The formula for calculating your balance would look like this:

Annual Benefit = (Compensation x Pay Credit) + (Account Balance x Interest Credit)

Now, say your beginning account balance is $100,000. Here’s how much you’d have if you apply this formula:

($120,000 x 0.05) + ($100,000 x 1.05) = $111,000

Cash balance plans are designed to provide a guaranteed source of income in retirement, either as a lump sum or annuity payments. The balance that you’re eligible to receive from one of these plans is determined by the number of years you work, your wages, the pay credit, and the interest credit.

Cash Balance Plan vs 401(k)

Cash balance plans and 401(k) plans offer two different retirement plan options. It’s possible to have both of these plans through your employer or only one.

In terms of how they’re described, a cash balance pension is a defined benefit plan while a 401(k) plan is a defined contribution plan. Here’s an overview of how they compare:

	Cash Balance Plan	401(k)
Funded By	Employer contributions	Employee contributions (employer matching contributions are optional)
Investment Options	Employers choose plan investments and shoulder all of the risk	Employees can select their own investments, based on what’s offered by the plan, and shoulder all of the risk
Returns	Account balance at retirement is determined by years of service, earnings, pay credit, and interest credit	Account balance at retirement is determined by contribution amounts and investment returns on those contributions
Distributions	Cash balance plans must offer employees the option of receiving a lifetime annuity; can also be a lump sum distribution	Qualified withdrawals may begin at age 59 ½; plans may offer in-service loans and/or hardship withdrawals

Pros & Cons of Cash Balance Pension Plans

A cash balance retirement plan can offer both advantages and disadvantages when planning your retirement strategy. If you have one of these plans available at work, you may be wondering whether it’s worth it in terms of the income you may be able to enjoy once you retire.

Here’s more on the pros and cons associated with cash balance pension plans to consider when you’re choosing a retirement plan.

Pros of Cash Balance Pension Plans

A cash balance plan can offer some advantages to retirement savers, starting with a guaranteed benefit. The amount of money you can get from a cash balance pension isn’t dependent on market returns, so there’s little risk to you in terms of incurring losses. As long as you’re still working for your employer and earning wages, you’ll continue getting pay credits and interest credits toward your balance.

From a tax perspective, employers may appreciate the tax-deductible nature of cash balance plan contributions. As the employee, you’ll pay taxes on distributions but tax is deferred until you withdraw money from the plan.

As for contribution limits, cash balance plans allow for higher limits compared to a 401(k) or a similar plan. For 2025, the maximum annual benefit allowed for one of these plans is $280,000. For 2026, the maximum annual benefit allowed is $290,000.

When you’re ready to retire, you can choose from a lump sum payment or a lifetime annuity. A lifetime annuity may be preferable if you’re looking to get guaranteed income for the entirety of your retirement. You also have some reassurance that you’ll get your money, as cash balance pension plans are guaranteed by the Pension Benefit Guaranty Corporation (PBGC). A 401(k) plan, on the other hand, is not.

Cons of Cash Balance Pension Plans

Cash balance pension plans do have a few drawbacks to keep in mind. For one, the rate of return may not be as high as what you could get by investing in a 401(k). Again, however, you’re not assuming any risk with a cash balance plan so there’s a certain trade-off you’re making.

It’s also important to consider accessibility, taxation, and fees when it comes to cash balance pension plans. If you need to borrow money in a pinch, for example, you may be able to take a loan from your 401(k) or qualify for a hardship withdrawal. Those options aren’t available with a cash balance plan. And again, any money you take from a cash balance plan would be considered part of your taxable income for retirement.

Pros	Cons
• Guaranteed benefits with no risk • Tax-deferred growth • Flexible distribution options • Higher contribution limits • Guaranteed by the PBGC	• Investing in a 401(k) may generate higher returns • No option for loans or hardship withdrawals • Distributions are taxable

Pros

Cons

• Guaranteed benefits with no risk

• Tax-deferred growth

• Flexible distribution options

• Higher contribution limits

• Guaranteed by the PBGC

• Investing in a 401(k) may generate higher returns

• No option for loans or hardship withdrawals

• Distributions are taxable

Investing for Retirement With SoFi

A cash balance retirement plan is one way to invest for retirement. It can offer a stated amount at retirement that’s based on your earnings and years of service. You can opt to receive the funds as either a lump sum or an annuity. Your employer may offer these plans alongside a 401(k) or in place of one, and there are pros and cons to each option to weigh.

If you don’t have access to either one at work, you can still start saving for retirement with an IRA. You can set aside money on a tax-advantaged basis and begin to build wealth for the long-term.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

Help grow your nest egg with a SoFi IRA.

FAQ

Is a cash balance plan worth it?

A cash balance plan can be a nice addition to your retirement strategy if you’re looking for a source of guaranteed income. Cash balance plans can amplify your savings if you’re also contributing to a 401(k) at work or an IRA.

Is a cash balance plan the same as a pension?

A cash balance plan is a type of defined benefit plan or pension plan, in which your benefit amount is based on your earnings and years of service. This is different from a 401(k) plan, in which your benefit amount is determined by how much you (and possibly your employer) contribute and the returns on those contributions.

Can you withdraw from a cash balance plan?

You can withdraw money from a cash balance plan in a lump sum or a lifetime annuity once you retire. You also have the option to roll cash balance plan funds over to an IRA or to a new employer’s qualified plan if you change jobs.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/sturti

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.

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.

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.

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Dec

2025

15 Ways to Invest $10,000 Right Now in 2025

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

If you have $10,000 that you can earmark for investing purposes, count yourself lucky. There are many ways to invest $10,000 right now, whether you’re thinking about long-term goals like retirement, or you’re interested in learning more about how to invest in the stock market.

A $10,000 investment can compound over the years into a substantial sum — although there is always the risk of loss when investing any amount of money. Whether you are a beginner or an experienced investor, investing $10,000 takes research and discipline to follow through on the choices that make sense for you.

Key Points

• Identify your financial goals and risk tolerance before choosing a strategy for investing $10,000.

• Retirement plans such as IRAs and 401(k)s offer tax advantages that may help you boost your savings.

• Putting your money in low-risk, high-yield savings accounts, which typically offer rates that are 8x or more those of average savings accounts, can help your money grow.

• Investing in ETFs, index funds and other mutual funds, alternatives, or individual stocks is higher risk, but may offer higher returns in time.

• One of the most effective ways to spend $10,000 is to pay off high-interest debt, which can cost thousands in interest payments over time.

What to Know Before You Invest $10,000

Before you review some of the different ways you can invest your money, it helps to identify what your goals are. After all, you don’t have to put the entire amount into a single option; you can split your money into various pots, so to say.

It may help to ask yourself some questions about what is important to you:

• Do you want to invest for a specific purchase or life event, such as buying a home or welcoming a child?

• Do you want to invest toward a more secure retirement and old age, perhaps by funding a retirement account?

• Are you interested in using the money you have to help you learn more about investing basics?

• Would it be prudent to pay off credit card debt, since eliminating debt is an investment by effectively increasing your net worth?

Understanding Growth vs. Risk

In addition to thinking about your goals, it’s important to consider what your risk tolerance is. While there are many ways to invest, some may involve more risk (or reward) than others. Some investors may want to swing for the fences with a high-risk venture, while others prefer to keep their cash as safe as possible.

As you weigh your investing choices, from stocks and bonds to alternative investments, keep in mind that higher-risk investments tend to offer more growth — with the downside that there’s a higher risk of losing money. Lower-risk investments, like buying bonds, generally offer lower returns (but also less risk of losing money).

15 Ways to Invest $10,000

Whether you want to be a hands-off type of investor or more of an active investor, there are countless choices to consider. We summarize 15 possibilities here.

While some of these may count as conventional options (e.g., investing via a retirement or college savings account), some are less so (e.g., investing in a business).

1. Start With an IRA

Opening an IRA provides you with the opportunity to save for your retirement, supplement existing retirement plans, and potentially benefit from tax advantages. A traditional or Roth IRA can be a great vehicle for tax-advantaged, long-term investments.

The annual IRA contribution limit for 2025 is $7,000; $8,000 for those 50 and older. For 2026, the annual contribution limit is $7,500; $8,600 for those 50 and older.

Other types of IRAs include SEP and SIMPLE IRAs. SEP IRAs are for small business owners and self-employed individuals, while SIMPLE IRAs are for employees and employers of small businesses. These have different contribution limits and rules than ordinary traditional or Roth IRAs.

In all cases, though, an IRA is just a tax-advantaged type of account. You must select investments to fill the IRA you choose.

2. Increase Your 401(k) Contributions

Another way to invest $10,000 is to increase your 401(k) contributions at work. Like IRAs, these are tax-advantaged accounts. Generally, you establish your 401(k) contributions through your workplace plan, and the money is deducted from your paycheck.

You could, however, increase your withholdings so that you’re adding $10,000 more to your accounts (or a percentage of that), as long as you don’t exceed the annual contribution limit.

Unlike IRAs, which have a fairly low annual contribution limit, you can contribute as much as $23,500 in your 401(k) for tax year 2025. If you’re 50 or older, you can contribute an additional $7,500, for a total of $31,000 in 2025. For tax year 2026, you can contribute as much as $24,500 in your 401(k), and if you’re 50 or older, you can contribute an additional $8,000, for a total of $32,500. For both 2025 and 2026, those aged 60 to 63 can contribute up to an additional $11,250 instead of $7,500 in 2025 and $8,000 in 2026, thanks to SECURE 2.0.

3. Open a High-Yield Savings Account

If you open a high-yield savings account with a competitive interest rate, this is a lower-risk way to save. Currently, a high-yield savings accounts may offer an annual percentage yield (APY) of approximately 3.00%. Just remember that terms vary considerably from bank to bank, and there are no guarantees the rate will remain constant.

Still, that means a $10,000 deposit in a high-yield savings account with a 3.00% APY could yield roughly $304.16 in interest in one year, assuming interest is compounded monthly, and there are no further deposits that year, and that the APY doesn’t change.

Another benefit of putting your money in a bank account is that your funds are typically FDIC-insured, up to $250,000, per depositor, per insured bank, for each account ownership category.

4. Be Debt Free

Knowing how to invest $10,000 today does not have to mean finding a high-performing stock. Simply paying off high-interest-rate debt can be like earning a guaranteed rate of return.

Think about it: If you’re carrying a $5,000 balance on a credit card that charges a 15.99% annual percentage rate (APR), paying off your balance means you are “saving” all that interest, rather than paying it to your card.

Given that most credit card issuers compound interest daily, those charges can add up to hundreds or even thousands of dollars per year (depending on your actual balance, and APR).

5. Beef Up Your Emergency Fund

Putting some or all of your $10,000 into an emergency fund could also pay off down the road. Having cash on hand to cover life’s inevitable curveballs means that you wouldn’t have to put more expenses on a credit card in a crisis, or take out a home loan or line of credit, and end up paying interest on borrowed funds.

Keeping your emergency fund in a high-yield savings account, as noted above, could offer another potential upside in the form of interest gained.

6. Get Healthy with an HSA

Another way to invest is to max out your Health Savings Account (HSA) contributions. Individual contributions are limited to $4,300 for 2025; $8,550 for a family. In 2026, individual contributions are limited to $4,400; $8,750 for a family. The money in the HSA account is yours, even if you switch jobs or health plans.

An HSA can be triple-tax advantaged. That means your contributions, which are typically made via withholdings from your paycheck, are tax-deductible, investment growth within the HSA builds tax-free, and you can withdraw funds for qualifying health-related expenses tax-free, too.

If you use HSA funds for non-qualified expenses before age 65, you could face a 20% penalty on the withdrawals.
However, if you don’t use the account much over the years, then you can use the account like a traditional IRA once you reach age 65. That means: You’d owe tax on the withdrawals, but you wouldn’t face a penalty — and you could use the funds for any purpose (not only health-related expenses).

7. Try U.S. Treasuries

Investing $10,000 in government bills, notes, and bonds is another way to help your money grow over time. U.S. Treasury bonds are often considered one of the safest investments, as they have the full faith and credit of the U.S. government backing them. Treasuries are available in short-, medium-, and long-term maturities.

Treasury bills are short-term debt securities that mature within one year or less.Treasury notes are longer-term and mature within 10 years.Treasury bonds mature in 30 years and pay bondholders interest every six months. Treasury Inflation-Protected Securities, or TIPS, are notes or bonds that adjust payments to match inflation. Investors can buy tips with maturities of five, 10 and 30 years; they pay interest every six months.

8. Explore Alternative Assets

Experienced investors who have a sizable portfolio and a sophisticated understanding of various markets might want to explore the world of alternative assets.

Alternative investments — commonly known as alts — differ from conventional stock, bond, and cash categories. Alts include a variety of securities such as commodities, foreign currencies, real estate, art and collectibles, derivative contracts, and more.

Alts are considered high-risk, but they may offer the potential for portfolio diversification. It’s also important to know they typically aren’t as regulated or transparent as traditional assets.

9. Build a Business

Starting your own venture is an intriguing idea in today’s tech-driven world. Taking $10,000 to fulfill an entrepreneurial dream could lead to future profits. But as with any business, success isn’t guaranteed and there is always the possibility of loss.

That said, it doesn’t have to take much capital to start a small business online or just offer your services to the market. Maybe you’re a professional with expertise in a certain area or perhaps you’ve honed a particular craft. You could consult with the Small Business Administration or other resources that might help you develop a solid business plan and put your $10,000 investment to good use.

10. College Savings

You could also invest $10,000 to help your kids or other family members via a college savings plan. The most common of these is a 529 college savings account.

These accounts, also known as qualified tuition plans, give individuals the option to save for college (or even elementary and secondary school and some training programs) on behalf of a beneficiary, while providing tax advantages. All states offer 529 plans; some offer a tax deduction for your contributions. Withdrawals for qualified educational expenses are tax free.

Be sure to understand the rules pertaining to the 529 plan you choose, because contribution limits vary from state to state, as do the investment options within the account.

11. Consider Low-Cost ETFs and Index Funds

If you’re looking for a low-cost investment option, you might want to consider
looking into index funds. Index funds are a type of mutual fund that utilize a passive investing strategy, i.e. they track an index like the S&P 500. They are not actively managed like some mutual funds, which have a live portfolio manager at the helm.

Most exchange-traded funds (ETFs) also rely on passive strategies, and as such typically have very low expense ratios. Lower investment fees can help investors keep more of their returns over time.

One of the advantages of investing in low-cost index funds and ETFs is that there are so many flavors of different funds these days. Stocks, bonds, REITs, small caps, large caps, sector funds, and dividend companies — these are just some of the fund types available.

12. Explore Municipal Bonds

If taxes are a concern, you may want to explore municipal bonds or bond funds, as these bonds are issued by state and local governments to pay for infrastructure and other amenities. Munis, as they’re called, feature interest income that is exempt from federal income tax, and sometimes state and local tax in the state where the bond was issued.

Investors might be helping to build a city park, better roads, or a new football stadium, for example. Those who like the idea of investing in a way that aligns with their personal values might find munis appealing.

13. Use a Robo Advisor

One way to go about building an investment portfolio is through a robo advisor service, also known as an automated portfolio. These computer-based platforms use sophisticated algorithms to select investments (typically low-cost ETFs), based on the risk tolerance and other objectives you indicate through a questionnaire.

The robo advisor then builds a portfolio, and provides services such as rebalancing and, in some cases, tax-loss harvesting for you.

You can invest in a robo advisor portfolio within an IRA or other type of account, as long as it’s offered by your broker or plan sponsor.

14. Get Real Estate Exposure with REITs

A real estate investment trust, or REIT, offers a way to invest in income-producing real estate without owning the properties directly. REITs can be advantageous because they must distribute at least 90% of taxable income to shareholders as dividends.

You can invest in REITs through buying REIT shares, mutual funds, or ETFs. While the benefits of REITs include passive income and portfolio diversification, REITs can be illiquid and sensitive to interest rate changes.

15. Pick Individual Stocks

Learning how to pick stocks is a lifelong endeavor. A committed stock investor typically does research on company fundamentals and other factors — such as its leadership team, reputation, and comparison to industry averages — before buying actual company shares.

For many investors, investing in individual stocks can be more rewarding than buying shares of a mutual fund, which may contain hundreds of stocks. Investing in individual shares allows you to put your money directly into organizations or products you believe in. Depending on the company, you may be able to choose between common or preferred stock (preferred shares qualify for dividend payouts).

And while equity markets can be volatile, over the last 20 years, the average return of the stock market as represented by the S&P 500 Index has been about 7.03%, adjusted for inflation.

The Takeaway

Deciding how to invest $10,000 is an exciting proposition. You can begin by recognizing your ideal level of risk, and identifying what your short- and long-term goals are. Once you set those key parameters, it’s easier to choose among the many investment options to find one that suits your aims and your comfort level.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Invest with as little as $5 with a SoFi Active Investing account.

Photo credit: iStock/Ridofranz

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN0322049
CN-Q425-3236452-63

Dec

2025

Required Minimum Distribution (RMD) Rules for 401(k)s

By Samuel Becker | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

When you turn 73, the IRS requires you to start withdrawing money from your 401(k) each year. These withdrawals are called required minimum distributions (or RMDs), and those who don’t take them face potential financial penalties.

The 401(k) RMD rules also apply to other tax-deferred accounts, including traditional IRAs, SIMPLE and SEP IRAs. Roth accounts don’t have RMDs for the account holder.

What’s important to know, as it relates to RMDs from 401(k)s, is that there can be tax consequences if you don’t take them when they’re required — and there are also tax implications from the withdrawals themselves.

Key Points

• The IRS mandates that individuals must begin withdrawing funds from their 401(k) accounts as required minimum distributions (RMDs) starting at age 73.

• RMD amounts are determined using IRS life expectancy tables, and failing to withdraw the required amount can result in a 50% penalty on the missed distribution.

• Although RMDs generally apply to various tax-deferred accounts, Roth IRAs do not require distributions while the owner is alive.

• Individuals can delay their first RMD until April 1 of the year following their 73rd birthday, but this may lead to higher taxes due to two distributions in one year.

• Inheriting a 401(k) requires RMDs as well, with specific rules differing for spouses versus non-spouses, including timelines for withdrawals.

What Is an RMD?

While many 401(k) participants know about the early withdrawal penalties for 401(k) accounts, fewer people know about the requirement to make minimum withdrawals once you reach a certain age. Again, these are called required minimum distributions (or RMDs), and they apply to most tax-deferred accounts.

The “required distribution” amount is based on specific IRS calculations (more on that below). If you don’t take the required distribution amount (aka withdrawal) each year you could face another requirement: to pay a penalty of 50% of the withdrawal you didn’t take. However, if you withdraw more than the required minimum each year, no penalty applies.

All RMDs from tax-deferred accounts, like 401(k) plans, are taxed as ordinary income. This is one reason why understanding the amount — and the timing — of RMDs can make a big difference to your retirement income.

What Age Do You Have to Start RMDs?

Prior to 2019, the age at which 401(k) participants had to start taking RMDs was 70½. Under the SECURE Act that was raised to age 72. But the rules have changed again, and the required age to start RMDs from a 401(k) is now 73 — for those who turn 72 after December 31, 2022.

However for those who turned 72 in the year 2022, at that point age 72 was still technically the starting point for RMDs.

But if you turn 72 in 2023, you must wait until you turn 73 (in 2024) to take your first RMD.

In 2033, the age to start taking RMDs will be increased again, to age 75.

How Your First Required Distribution Is Different

There is a slight variation in the rule for your first RMD: You actually have until April 1 of the year after you turn 72 to take that first withdrawal. For example, say you turned 72 in 2022. you would have until April 1, 2023 to take your first RMD.

But you would also have to take the normal RMD for 2023 by December 31 of the same year, too — thus, potentially taking two withdrawals in one year.

Since you must pay ordinary income tax on the money you withdraw from your 401(k), just like other tax-deferred accounts, you may want to plan for the impact of two taxable withdrawals within one calendar year if you go that route.

Why Do Required Minimum Distributions Exist?

Remember: All the money people set aside in defined contribution plans like traditional IRAs, SEP IRAa, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit-sharing plans, and so on, is deposited pre-tax. That’s why these accounts are typically called tax-deferred: the tax you owe is deferred until you retire.

So, requiring people to take a minimum withdrawal amount each year is a way to ensure that people eventually pay tax on the money they saved.

How Are RMDs Calculated?

It can get a bit tricky, but 401(k) RMDs are calculated by dividing the account balance in your 401(k) by what is called a “life expectancy factor,” which is basically a type of actuarial table created by the IRS. You can find these tables in Publication 590-B from the IRS.

If you’re married, there are two different tables to be aware of. If you are the original account owner, and if your spouse is up to 10 years younger than you, or is not your sole beneficiary, you’d consult the IRS Uniform Lifetime Table.

If your spouse is the primary beneficiary, and is more than 10 years younger, you’d consult the IRS Joint and Last Survivor table. Here, the RMD might be lower.

How does the life expectancy factor work?

As a simple example, let’s say a 75-year-old has a life expectancy factor of 24.6, according to the IRS. If that person has a portfolio valued at $500,000, they’d have to take an RMD of $20,325 ($500,000/24.6) from their account that year.

RMDs can be withdrawn in one sum or numerous smaller payments over the course of a year, as long as they add up to the total amount of your RMD requirement for that calendar year.

RMD Rules for 401(k) Plans

So just to recap, here are the basic RMD rules for 401(k) plans. Because these rules are complicated and exceptions may apply, it may be wise to consult with a professional.

Exceptions to Required Distributions

There aren’t many exceptions to 401(k) RMDs. In fact, there’s really only one.

If you’re working for the company sponsoring your 401(k) when you turn 73 years old (as of 2023), and you don’t own more than 5% of the firm, you may be able to skirt RMDs. That is, so long as you keep working for the company, and as long as your plan allows you to do so — not all will.

This only applies to 401(k)s. So if you’re weighing your options as it relates to a 401(a) vs 401(k), for instance, you’ll find they’re limited.

At What Age Do RMDs Start?

As mentioned, you must take your first RMD the same year you turn age 73, with the new rules being applied for 2023 under the SECURE ACT 2.0. Again: for your first RMD only, you are allowed to delay the withdrawal until April 1 of the year after you turn 73.

This has pros and cons, however, because the second RMD would be due on December 31 of that year as well. For tax purposes, you might want to take your first RMD the same year you turn 73, to avoid the potentially higher tax bill from taking two withdrawals in the same calendar year.

What Are RMD Deadlines?

Aside from the April 1 deadline available only for your first RMD, the regular deadline for your annual RMD is December 31 of each year. That means that by that date, you must withdraw the required amount, either in a lump sum or in smaller increments over the course of the year.

Calculating the Correct Amount of Your RMD

Also as discussed, the amount of your RMD is determined by tables created by the IRS based on your life expectancy, the age of your spouse, marital status, and your spouse’s age.

You’re not limited to the amount of your RMD, by the way. You can withdraw more than the RMD amount at any point. These rules are simply to insure minimum withdrawals are met. Also keep in mind that if you withdraw more than the RMD one year, it does not change the RMD requirement for the next year.

Penalties

The basic penalty, if you miss or forget to take your required minimum distribution from your 401(k), is 25% of the amount you were supposed to withdraw — or 10% if the amount is corrected within two years. (The penalty used to be 50%, but in 2023, under SECURE 2.0, it was reduced.)

For example, let’s say you were supposed to withdraw a total of $10,500 in a certain year, but you didn’t; in that case you could potentially get hit with a 25% penalty, or $2,625. But let’s say you’ve taken withdrawals all year, but you miscalculated and only withdrew $7,300 total.

Then you would owe a 25% penalty on the difference between the amount you withdrew and the actual RMD amount: $10,500 – $7,300 = $3,200 x .25 = $800. However, if you corrected the mistake within two years, you would only owe a 10% penalty, which is $325.

How Did COVID Change RMD Rules?

The pandemic ushered in some RMD rule changes for a time, and it may be easy to get mixed up given those changes. But you should know that things are more or less back to “normal” now (as of 2021) as it relates to RMD rules, so you’ll need to plan accordingly.

As for that rule change: There was a suspension of all RMDs in 2020 owing to COVID. Here’s what happened, and what it meant for RMDs at the time:

• First, in 2019 the SECURE Act changed the required age for RMDs from 70½ to 72, to start in 2020.

• But when the pandemic hit in early 2020, RMDs were suspended entirely for that year under the CARES Act. So, even if you turned 72 in the year 2020 — the then-new qualifying age for RMDs that year — RMDs were waived.

Again, as of early 2021, required minimum distributions were restored. So here’s how it works now, taking into account the 2020 suspension and the new age for RMDs.

• If you were taking RMDs regularly before the 2020 suspension, you needed to resume taking your annual RMD by December 31, 2021.

• If you were eligible for your first RMD in 2019 and you’d planned to take your first RMD by April 2020, but didn’t because of the waiver, you should have taken that RMD by December 31, 2021.

• If you turned 72 in 2020, and were supposed to take an RMD for the first time, then you could have had until April 1, 2022 to take that first withdrawal. (But you could have taken that first withdrawal in 2021, to avoid the tax burden of taking two withdrawals in 2022.)

RMDs When You Have Multiple Accounts

If you have multiple accounts — e.g. a 401(k) and two IRAs — you would have to calculate the RMD for each of the accounts to arrive at the total amount you’re required to withdraw that year. But you would not have to take that amount out of each account. You can decide which account is more advantageous and take your entire RMD from that account, or divide it among your accounts by taking smaller withdrawals over the course of the year.

What Other Accounts Have RMDs?

While we’re focusing on 401(k) RMDs, there are numerous other types of accounts that require them as well. As of 2023, RMD rules apply to all employer-sponsored retirement accounts, according to the IRS — a list that includes IRAs (SEP IRAs, SIMPLE IRAs, and others), but not Roth IRAs while the owner is alive (more on that in a minute).

So, if you have an employer-sponsored retirement account, know that the IRA withdrawal rules are more or less the same as the rules for a 401(k) RMD.

Allocating Your RMDs

Individuals can also decide how they want their RMD allocated. For example, some people take a proportional approach to RMD distribution. This means a person with 30% of assets in short-term bonds might choose to have 30% of their RMD come from those investments.

Deciding how to allocate an RMD gives an investor some flexibility over their finances. For example, it might be possible to manage the potential tax you’d owe by mapping out your RMDs — or other considerations.

Do Roth 401(k)s Have RMDs?

No, Roth 401(k) plans no longer have required minimum distributions, similar to Roth IRAs. But if you bequeath a Roth IRA it’s another story. Since the rules surrounding inherited IRAs can be quite complicated, it’s wise to get advice from a professional.

Can You Delay Taking an RMD From Your 401(k)?

As noted above, there is some flexibility with your first RMD, in that you can delay your first RMD until April 1 of the following year. Just remember that your second RMD would be due by December 31 of that year as well, so you’d be taking two taxable withdrawals in the same year.

Also, if you are still employed by the sponsor of your 401(k) (or other employer plan) when you turn 73, you can delay taking RMDs until you leave that job or retire.

RMD Requirements for Inherited 401(k) Accounts

Don’t assume that RMDs are only for people in or near retirement. RMDs are usually required for those who inherit 401(k)s as well. The rules here can get quite complicated, depending on whether you are the surviving spouse inheriting a 401(k), or a non-spouse. In most cases, the surviving spouse is the legal beneficiary of a 401(k) unless a waiver was signed.

Inheriting a 401(k) From Your Spouse

If you’re the spouse inheriting a 401(k), you can rollover the funds into your own existing 401(k), or you can rollover the funds into what’s known as an “inherited IRA” — the IRA account is not inherited, but it holds the inherited funds from the 401(k). You can also continue contributing to the account.

Then you would take RMDs from these accounts when you turned 73, based on the IRS tables that apply to you.

Inheriting a 401(k) From a Non-Spouse

If you inherit a 401(k) from someone who was not your spouse, you cannot rollover the funds into your own IRA.

You would have to take RMDs starting Dec. 31 of the year after the account holder died. And you would be required to withdraw all the money from the account within five or 10 years, depending on when the account holder passed away.

The five-year rule comes into play if the person died in 2019 or before; the 10-year rule applies if they died in 2020 or later.

Other Restrictions on Inherited 401(k) Accounts

Bear in mind that the company which sponsored the 401(k) may have restrictions on how inherited funds must be handled. In some cases, you may be able to keep 401(k) funds in the account, or you might be required to withdraw all funds within a certain time period.

In addition, state laws governing the inheritance of 401(k) assets can come into play.

As such, if you’ve inherited a 401(k), it’s probably best to consult a professional who can help you sort out your individual situation.

How to Avoid RMDs on 401(k)s

While a 401(k) grows tax-free during the course of an investor’s working years, the RMDs withdrawal is taxed at their current income tax rate. One way to offset that tax liability is for an investor to consider converting a 401(k) into a Roth IRA in the years preceding mandatory RMDs. Roth IRAs are not subject to RMD rules.

What Is a Roth Conversion?

A Roth conversion can be done at any point during an investor’s life, and can be done with all of the 401(k) funds or a portion of it.

Because a 401(k) invests pre-tax dollars and a Roth IRA invests after-tax dollars, you would need to pay taxes right away on any 401(k) funds you converted to a Roth. But the good news is, upon withdrawing the money after retirement, you don’t have to pay any additional taxes on those withdrawals. And any withdrawals are at your discretion because there are no required distributions.

Paying your tax bill now rather than in the future can make sense for investors who anticipate being in a higher tax bracket during their retirement years than they are currently.

The Backdoor Roth Option

Converting a 401(k) can also be a way for high earners to take advantage of a Roth. Traditional Roth accounts have an income cap. To contribute the maximum to a Roth IRA in 2025, your modified adjusted gross income (MAGI) must be less than $150,000 if you’re single, and less than $236,000 if you’re married filing jointly, with phaseouts if your income is higher.

To contribute the maximum to a Roth IRA in 2026, your modified adjusted gross income (MAGI) must be less than $153,000 if you’re single, and less than $242,000 if you’re married filing jointly, with phaseouts if your income is higher. But those income rules don’t apply to Roth conversions (thus they’re sometimes called the “backdoor Roth” option).

Once the conversion occurs and a Roth IRA account is opened, an investor needs to follow Roth rules: In general, withdrawals can be taken after an account owner has had the account for five years and the owner is older than 59 ½, barring outside circumstances such as death, disability, or first home purchase.

What Should an Investor Do With Their RMDs?

How you use your RMD funds depends on your financial goals. Fortunately, there are no requirements around how you spend or invest these funds (with the possible exception that you cannot take an RMD and redeposit it in the same account).

• Some people may use their RMDs for living expenses in their retirement years. If you plan to use your RMD for income, it’s also smart to consider the tax consequences of that choice in light of other income sources like Social Security.

• Other people may use their 401(k) RMDs to fund a brokerage account and continue investing. While you can’t take an RMD and redeposit it, it’s possible to directly transfer your RMD into a taxable account. You will still owe taxes on the RMD, but you could stay invested in the securities in the previous portfolio.

Reinvesting RMDs might provide a growth vehicle for retirement income. For example, some investors may look to securities that provide a dividend, so they can create cash flow as well as maintain investments.

• Investors also may use part of their RMD to donate to charity. If the funds are directly transferred from the IRA to the charity (instead of writing out a check yourself), the donation will be excluded from taxable income.

While there is no right way to manage RMDs, coming up with a plan can help insure that your money continues to work for you, long after it’s out of your original 401(k) account.

The Takeaway

Investors facing required minimum distributions from their 401(k) accounts may want to fully understand what the law requires, figure out a game plan, and act accordingly. While there are a lot of things to consider and rules to reference, ignoring 401(k) RMDs can result in sizable penalties.

Even if you’re not quite at the age to take RMDs, you may want to think ahead so that you have a plan for withdrawing your assets that makes sense for you and your loved ones. It can help to walk through the many different requirements and options you have as an account holder, or if you think you might inherit a 401(k).

As always, coming up with a financial plan depends on knowing one’s options and exploring next steps to find the best fit for your money. If you’re opening a retirement account such as an IRA or Roth IRA, you can do so at a brokerage, bank, mutual fund house, or other financial services company, like SoFi Invest®.

Help grow your nest egg with a SoFi IRA.

FAQ

Is my 401(k) subject to RMDs?

Yes, with very few exceptions, 401(k)s are subject to RMDs after its owner reaches age 73, as of 2023. What those RMDs are, exactly, varies depending on several factors.

How to calculate your RMD for your 401(k)?

It’s not an easy calculation, but RMDs are basically calculated by dividing the owner’s account balance by their life expectancy factor, which is determined by the IRS. That will give you the amount you must withdraw each year, or face a penalty.

Can you avoid an RMD on your 401(k)?

You can, if you’re willing to convert your traditional 401(k) account to a Roth IRA. Roth IRAs do not require RMDs, but you will owe taxes on the funds you convert.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

Dec

2025

A close-up of a person’s hand taking a small slice out of a circle that has been cut into different size wedges.

How Often Are Dividends Paid?

By Pam O’Brien | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Are Dividends?
How Often Are Dividends Paid Out?
Important Dividend Dates
When Are Dividends Paid?
Different Dividend Payout Methods
Are Dividends Taxable?
Can You Live on Dividends?
FAQ

Dividends are a portion of earnings that a company pays to certain shareholders who own dividend-paying stock. Dividends are generally paid quarterly, although the timing of dividend payments can vary depending on the company: some dividends might be monthly, or twice a year.

Most companies pay dividends in cash, or as additional shares of stock. Investors can take dividend payouts to supplement income or savings (or other goals). They can also reinvest their dividends as part of a dividend reinvestment plan, or DRIP.

Not all companies pay dividends, however. And just because a company pays dividends now doesn’t mean it will continue to do so. A company can stop paying dividends at any time.

Investors may be qualified to receive dividends depending on when they purchase shares of stock. It’s important to understand the key dates regarding dividend payouts.

Key Points

• Dividends are a portion of a company’s earnings paid to qualified shareholders typically each quarter.

• Some stocks may pay dividends monthly, semi-annually, annually, or on an irregular schedule.

• Dividends can be paid in cash, company stock (often through dividend reinvestment plans), or, rarely, as property.

• Key dates involved in dividend payments include the declaration date, date of record, ex-dividend date, and payment date.

• Dividend income is taxable, with the tax rate depending on whether it’s a qualified or nonqualified dividend and the investor’s tax situation.

What Are Dividends?

Companies will sometimes share a portion of their profits with shareholders, and this is called a dividend. Dividends are typically distributed as cash, although it’s also possible to receive a dividend in the form of stock (or some other asset).

Typically, dividends work on a per-share basis. Investors who buy stocks online or through a traditional brokerage can look for dividend-paying stocks. For example, if Company A pays a quarterly cash dividend of 50 cents per share, and an investor owns 50 shares, they would receive $25 in cash every quarter.

If a company pays a stock dividend, it’s usually a percentage increase in the number of shares an investor owns. So if Company A awards a 5% stock dividend and an investor owns 100 shares of Company A, they would have 105 shares after the dividend payout.

Remember that dividend income is taxable (see below), and dividends are not guaranteed. A company may start or stop paying dividends at any time.

Recommended: Stock Market Basics

How Often Are Dividends Paid Out?

In most cases in the U.S., dividends are paid quarterly, on the same schedule as the company must report earnings.

If you’re wondering why companies generally pay quarterly vs. monthly dividends, it makes sense that dividends would come only after a company has finalized its income statement and its board of directors has reviewed (and approved) the numbers.

Some investments pay dividends on other schedules, such as twice a year, once a year, or monthly, for monthly dividend stocks, or on no schedule at all (called “irregular” dividends, though this isn’t typical in the United States). Ultimately, the dividend payout schedule is up to a company’s board of directors.

It’s also possible for a company to pay a special one-time dividend. Usually a special dividend is paid out when a company has had a stronger-than-usual earnings period or has excess cash on hand — from the sale of a business, perhaps, or the liquidation of an investment, or a major litigation win. These special one-time dividends may be paid as cash, stock, or property dividends.

When it comes to mutual funds that invest in dividend-paying companies, they may pay dividends on a more frequent basis, such as monthly or even weekly. It may be possible to invest in dividend funds, or even dividend stocks, when you open an IRA.

Important Dividend Dates

There are four essential dates involved in the payment of dividends. It’s important for investors to pay attention to these dates, to ensure they’re getting the dividend payout they hope for.

1. Declaration date. Also called the announcement date, this is the day that a company’s board of directors states their intention to pay a dividend. It’s typically announced every quarter.

2. Date of record and ex-dividend date. The record date and the ex-dividend date used to be separate dates. Now owing to the T+1 settlement rule, whereby trades must settle within one business day, they are typically the same in the U.S.

Nonetheless, they signify two different actions by the company which can impact investors. The first is the date of record: shareholders must be on the company books before this date in order to get the dividend. Shareholders who buy stock on or after this date, which is also the ex-dividend date (i.e., the date that quarter’s dividend expires), will not qualify for the dividend and it will go to the seller for that quarter.

Note that if the date of record falls on a weekend or holiday, the ex-dividend date in that case is the business day before.

3. Payment date: This is when dividends are paid to company shareholders.

IMPORTANT DIVIDEND DATES for 5 Companies in the S&P 500 Dividend Aristocrats Index, paying qualified dividends, as of 9/03/25
Company	Dividend Payout	Declaration Date	Record Date / Ex-Dividend Date	Payment Date
Kimberly-Clark Corp (KMB)	$1.26	Aug. 1, 2025	Sept. 5, 2025	Oct. 2, 2025
Leggett & Platt (LEG)	$0.05	Aug. 7, 2025	Sept. 15, 2025	Oct. 15, 2025
Farmers & Merchants Bancorp (FMCB)	$0.27	Aug. 30, 2025	Oct. 10, 2025	Oct. 20, 2025
3M Company (MMM)	$0.73	Nov. 4, 2025	Nov. 14, 2025	Dec. 12, 2025
Gorman-Rupp Company (GRC)	$0.19	Oct. 24, 2025	Nov. 14, 2025	Dec. 10, 2025

Sources: Kimberly-Clark Corp, Leggett & Platt, Farmers & Merchants Bancorp, 3M Company, Gorman-Rupp Company

Typically, investors can get information about a company’s dividend dates by visiting its investor relations page. To find this, search for the company’s name and “investor relations” online. Or check a company’s dividend history online. Many investment websites, including Nasdaq.com, track this information.

When Are Dividends Paid?

Once a company’s board of directors approves a plan to pay out dividends, the company announces the dividend payment information, including: the dividend amount to be paid, the date it will be paid, and the date of record and the ex-dividend date (which typically occur together, unless the record date falls on a weekend or holiday).

On the payment date, the dividend is paid to investors who owned the stock before the ex-dividend date. Consider the following hypothetical example:

• Company A announces its dividend payout on September 1, 2025. This is the declaration date for a dividend payout on Sept. 17.

• Sunday, Sept. 14 is the record date. Shareholders must be on record as owning the company stock before September 14, in order to get the dividend.

• The ex-dividend date cannot fall on a weekend or holiday, so it’s set to the business day before the record date: Friday, September 12, 2025. In order to get the dividend, an investor must buy shares before the ex-dividend date.

• The dividend itself will be paid on Wednesday, Sept. 17, 2025.

Different Dividend Payout Methods

These are some of the ways dividends may be paid to investors.

Cash Dividends

Dividends are often paid in cash. Companies typically send cash dividends directly to an investor’s brokerage, where the money is deposited into their account. The company might also mail a check to stockholders.

Company Stock Dividends

In other cases, investors will be paid in company stocks. Some companies and mutual funds offer the option of a dividend reinvestment plan (DRIP) that will automatically buy additional shares for an investor with their dividends. This provides the advantages of both simplifying the process (since investors won’t have to receive the cash and buy more shares themselves) and potentially being more cost effective, since many DRIP programs don’t charge commissions.

Additionally, some DRIP programs discount the purchase of additional shares. For this and other reasons, some investors may specifically look to find dividend reinvestment stocks.

Property Dividends

More rarely, a company might award a property dividend instead of cash or stock payouts. This could include company products, shares of a subsidiary company, or physical assets the company owns.

Are Dividends Taxable?

Dividend income is always taxable, but tax treatment depends on the type of dividend the shareholder gets (qualified or nonqualified dividends), as well as the type of account in which the dividend stock is held.

The Type of Account Impacts How Dividends Are Taxed

For instance, if an investor is holding the investment in a retirement account such as a 401(k) or IRA, the dividend isn’t taxable the year it’s paid because it’s deposited in a tax-deferred account.

In this case, though, any dividend income would be taxed along with any other funds upon withdrawal in retirement.

If an investor holds dividend funds or dividend-paying stocks in a Roth IRA, the tax treatment is different. Here, contributions are after tax, and withdrawals are tax free.

If the investment is held in a taxable account, like a brokerage account, then a dividend is considered income, and the tax rate will depend on whether it’s a qualified dividend or nonqualified (ordinary) dividend.

Tax Rate for Qualified Dividends

These are dividends paid by a U.S. corporation or a qualified foreign corporation on stock that an investor has held for a certain period of time — generally more than 60 days during the 121-day period that starts 60 days before the ex-dividend date.

For some preferred stock, the investor must have held it for 91 days out of the 181-day period starting 90 days before the ex-dividend date. Taxes on qualified dividends (vs. ordinary dividends) are paid at long-term capital gains rates, which range from 0% to 20% based on an individual’s modified adjusted gross income.

In other words, the taxes investors pay on qualified dividends are based on their overall income tax bracket, and they could pay 0%, depending on their income. Because the long-term capital gains tax rate is lower than ordinary income tax rate, qualified dividends are preferable to nonqualified dividends.

2025 Tax Rates for Long-Term Capital Gains

Following are long-term capital-gains tax rates for the 2025 tax year, according to the IRS.

Capital Gains Tax Rate	Income — Single	Married, Filing Jointly	Married, Filing Separately	Head of Household
0%	Up to $48,350	Up to $96,700	Up to $48,350	Up to $64,750
15%	$48,351 to $533,400	$96,701 to $600,050	$48,351 to $300,000	$64,751 – $566,700
20%	Over $533,400	Over $600,050	Over $300,000	Over $566,700

Additionally, note that those who have net investment income and modified adjusted gross incomes (MAGIs) over $200,000 — or couples filing jointly with MAGIs over $250,000 — may have to pay the Net Investment Income Tax (NIIT). This is 3.8% on either net investment income or the excess over the MAGI limits, whichever is less.

2026 Tax Rates for Long-Term Capital Gains

Following are long-term capital-gains tax rates for the 2026 tax year.

Capital Gains Tax Rate	Income — Single	Married, Filing Jointly	Married, Filing Separately	Head of Household
0%	Up to $49,450	Up to $98,900	Up to $49,450	Up to $66,200
15%	$49,451 to $545,500	$98,901 to $613,700	$49,451 to $306,850	$66,201 – $579,600
20%	Over $545,500	Over $613,700	Over $306,850	Over $579,600

Again, note that those who have net investment income and MAGIs over $200,000 — or couples filing jointly with MAGIs over $250,000 — may have to pay the Net Investment Income Tax (NIIT). This is 3.8% on either net investment income or the excess over the MAGI limits, whichever is less.

Tax Rate for Nonqualified Dividends

The more common type of dividend is a nonqualified — or ordinary — dividend. When companies pay ordinary dividends, they’re considered ordinary income, so an investor will be taxed at ordinary income tax rates.

In general, investors should assume that any dividend they receive is an ordinary dividend unless told otherwise. (The payer of the dividend is required to identify the type of dividend when they report them on Form 1099-DIV at tax time.)

Can You Live on Dividends?

In general, retirees may want to live off a combination of Social Security, interest income from bonds, and selling a small portion of their investments each year. The 4% retirement rule maintains that if one withdraws no more than 4% of their portfolio each year, they’ll be able to make their nest egg last — although some financial professionals believe this formula is too conservative.

Investments that pay regular dividends may shift an individual’s retirement equation by providing steady income over time that may allow them to sell fewer investments — or no investments at all.

The amount of dividends a stock pays may grow over time as companies get larger and continue to increase their profits. But the reverse is also possible; a company could stop paying dividends, choosing to reinvest its cash in business operations.

Investing with an eye toward dividend income may allow an investor to create an income stream that could supplement their Social Security and other income in retirement.

The Takeaway

Dividends — cash or stock payments from a company to qualified shareholders — are typically paid quarterly. These financial rewards can be attractive to investors, who may seek out dividend-paying companies in hopes of boosting their income or savings.

Dividends may provide a source of consistent and predictable income, which may be a helpful addition to an individual’s portfolio, depending on their investing goals. Investors may choose to use dividend income to supplement other income or to reinvest in their portfolio.

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FAQ

How long do you have to hold a stock to get a dividend?

Investors must buy, or already own, shares of the stock before the ex-dividend date, which is now the same as the date of record. The date of record is when the company reviews its records to determine who its shareholders are, and who qualifies for a dividend payout. If the date of record falls on a weekend or holiday, the ex-dividend date is the business day prior, and shareholders who buy stock on or after that date will not receive a dividend until the following quarter (or relevant time period).

Are dividends taxed if they are reinvested?

Yes. Dividends that are reinvested are considered income, just like cash dividends, and must be reported on your tax return. The way you are taxed on dividends depends on whether your dividends are qualified or nonqualified. The more common type of dividend is nonqualified, and these dividends are taxed at ordinary income tax rates. Qualified dividends are taxed at long-term capital gains rates.

What happens if you see more dividends than profit?

Typically, a portion of a company’s earnings may go to paying dividends. This is known as the dividend payout ratio. Investors typically look for payout ratios that are 80% or less — meaning that the company is not paying all of its earnings in dividends.

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SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Mutual Funds (MFs): Investors should read and carefully consider the information contained in the prospectus, which contains the Mutual Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or SoFi's customer service at: 1.855.456.7634. Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risks. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may have tax implications.

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
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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