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While some states have passed legislation ensuring paid family leave for employees at larger companies, many new parents have to make do with a combination of vacation time, sick days, and short-term disability if they want to be paid after the birth of a baby.

Read on to find out what parents may be entitled to based on state regulations and company policy and how you can maximize your benefits so you can get paid while on maternity leave.

What Is Paid Maternity Leave?

Paid maternity leave (or paternity leave) refers to the time off with pay that some companies grant employees welcoming a new baby or adopted child. Workers often receive only a percentage of their full-time pay, with limits based on statewide average pay.

In the United States, businesses are not legally required to give employees paid maternity leave. According to the Bureau of Labor Statistics, only 27% of civilian workers had access to paid family leave in 2023. The U.S. is the only wealthy nation in the world that doesn’t mandate paid parental leave.

Fortunately, 14 states and the District of Columbia have passed legislation guaranteeing paid parental leave. Two other states (New Hampshire and Vermont) do not legally guarantee the right to paid leave, but they do provide a voluntary opportunity for workers to purchase insurance that covers paid leave. Federal workers nationwide are granted 12 weeks of paid family leave.

How Long Is Maternity Leave?

Companies that voluntarily provide employees paid parental leave offer an average of 10 weeks. Because many parents find this inadequate and experts recommend 3 to 6 months, even employees with paid leave often extend their leave with vacation time and sick days.

Globally, the average paid maternity leave is 16.3 weeks.

Benefits of Paid Family Leave

Research shows that paid family leave offers many benefits to parents and children. In one sense, the extra income helps families over the longer term, especially in lower-income households.

In another way, the time families spend together boosts the health of new parents and children. Mothers are able to fully recover from childbirth, which can take six to eight weeks. And a child’s health is strengthened by the extra bonding time, regular breastfeeding, and reduced exposure to infectious disease.

Paid family leave may also cover other situations, including:

•   Adoption or foster child care

•   Care of a spouse, child, or parent with a serious health condition

•   A personal serious health condition

Recommended: How Much Does It Cost to Adopt a Child?

What Is the Family and Medical Leave Act (FMLA)?

The Family and Medical Leave Act (FMLA) is a federal law passed in 1993 that grants unpaid but job-protected family leave for eligible employees of larger companies. Individuals can also take time off to care for any family member with a serious health condition.

The law is designed to help workers cope with emergencies that may occur without having to worry about losing their job. It also ensures that leave is available on a gender-neutral basis and supports equal employment opportunity for women and men.

FMLA Maternity Leave Eligibility Requirements

For an employee to qualify for FMLA benefits, both the employer and employee must meet certain requirements.

Employer Requirements

FMLA applies only to employers with 50 or more employees (who have worked at least 20 weeks in the current or preceding calendar year) within 75 miles.

Worker Requirements

An employee must have worked for their company for at least 12 months and worked 1,250 hours within the past 12 months. Some part-time workers may not qualify.

State Laws for Maternity Leave

As noted above, 14 states and the District of Columbia have passed paid parental leave legislation, including California, Colorado, Connecticut, Delaware, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Virginia, and Washington, plus the District of Columbia. Benefits and eligibility vary from state to state.

Ways to Extend Maternity Leave

Traditionally, women without adequate maternity benefits have made do by cobbling together vacation and sick days, short-term disability, and unpaid leave. More recently, working from home, sometimes on a reduced schedule, has allowed parents to extend their time at home with pay.

You may want to search for a parental leave consultant in your state, such as MilkYourBenefits.com in California. For a fee, these advisors can provide up-to-date information on family leave law and the benefits you may qualify for.

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How to Prepare for Maternity Leave

It’s a good idea to prepare financially for maternity leave well in advance. Put away money and save for your baby. Here’s a rough timeline to help you plan for the big event.

1. Research State Laws and Company Policies

Before you announce that you are pregnant, find out what your company and state rules are for maternity leave. You can also look into how your medical insurance will work while you are out and how to add your baby to your plan. Check whether your premiums will go up.

You don’t have to inform your employer at this early stage. Your company should have an employee handbook that outlines family leave benefits, or it might be written into your contract.

If you experience pre- or postnatal health problems (such as high blood pressure, gestational diabetes, preterm labor, or a C-section), you might qualify for short-term disability. However, know that disability benefits for pregnancy-related reasons are available only in some states.

2. Develop a Maternity Leave Plan

Notify your employer of your pregnancy as you begin to show. Prepare for negotiating your leave by creating a plan for coverage while you are gone. For example, suggest a colleague you can train before you take leave. Explain how you plan to keep in touch with work while you are out. Read up on the motherhood penalty to understand how your career and financial situation may be affected and how you can prepare.

Company maternity leave policy is not set in stone. You can negotiate with your employer to extend your paid time off, or perhaps propose a work-from-home or part-time arrangement.

Your boss may not agree with your plan, so consider it a jumping-off point. One tactic is to present to your employer two or three options that you can live with. Your supervisor may well pick one of them. Finally, put it in writing and have it signed so that your employer cannot renege.

3. Start Planning Your Budget

Once you have a general idea of your income during maternity leave, prepare a new budget that includes all of your anticipated expenses. Check out tips on how to budget on a fluctuating income, and think about other things that may change your financial situation in the next year. Will you need a home loan while on maternity leave, for example?

A budget planner app can make budgeting easier because it tracks your expenses for you and gives a breakdown of your spending by category. A grocery budget planner may come in handy as well.

4. Write a Plan for Your Replacement

Before you write out instructions for those who will cover for you while you are gone, have a discussion with your teammates to make sure they are on board. Include in your instructions the estimated dates that you will be gone, who will be responsible for what, and how you will communicate with your team (whether you will take part in meetings remotely, etc.).

The Takeaway

FMLA requires employers with 50 or more employees to offer up to 12 weeks of unpaid maternity leave, but only about one in four private companies offers paid maternity leave. Paid time may end up being cobbled together from a combination of vacation time, sick days, short-term disability, and work-from-home time. Make sure you carefully research the benefits that you’re entitled to based on state regulations and company policy.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

What questions should I ask HR before going on maternity leave?

Ask HR what benefits you are entitled to and how your health insurance will change after the birth or adoption. It’s also important to ensure the required forms are completed and any negotiated agreements for maternity leave are laid out in writing and signed by your employer.

How should you prepare financially for maternity leave?

In an ideal world, you would start saving for the baby before you are pregnant. Once you have negotiated your maternity leave and have an idea of your income, create a new budget that includes baby expenses.

Also check whether you qualify for any tax credits such as the Child Tax Credit, the Child and Dependent Care Credit, the Adoption Tax Credit and adoption assistance programs. Taking out a 529 college savings plan for your child may have tax advantages.

What is short-term disability insurance and how does it impact maternity leave?

Short-term disability is an insurance program offered by some employers. Policies vary, but you might be entitled to 50% of your income or more for up to six weeks after giving birth if you have a C-section or experience complications. Check with your staff handbook and your HR department to find out if you might be eligible for short-term disability.

Photo credit: iStock/Maria Korneeva

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SORL-Q226-037

Has this happened to you? You’re thinking about getting a personal loan but haven’t yet applied. Then you get a letter in the mail: “You’re preapproved or prequalified for a personal loan!” What does that mean?

Some lenders use “prequalified” interchangeably with “preapproved,” but they are different. Here, we’ll discuss preapproval vs. prequalification and how to know if you’re a good candidate for a personal loan.

What Does Being Prequalified for a Loan Mean?

Prequalification is sometimes considered the first step in the loan approval process. You can think of it as a less comprehensive version of a preapproval. Prequalification simply means that you fit the general description of a customer typically qualified for a loan.

Based on your general profile, the lender can give you an idea of the size of loan you can qualify for. While prequalification can be done fairly quickly, it does not involve a full analysis of your credit report or verification of the financial information you provide. Because of that, there’s no guarantee that your loan will be approved.

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What Does Loan Preapproval Mean?

Preapproval is a more in-depth stage of the personal loan approval process. A lender will have accessed your financial history to assess you as a potential customer. Being preapproved means that, based on the information accessed, you’ll most likely be approved for a loan.

Preapproval allows the lender to show you the size of the loan you might qualify for, as well as the interest rate and loan terms they’re willing to offer. It’s a step closer to final approval of your loan application. However, this doesn’t automatically translate to being fully approved. For example, a hard credit inquiry can pull in information previously unseen by the lender that was not considered at the preapproval stage.

Does Prequalification or Preapproval Affect Your Credit Score?

Lenders typically prequalify you based on financial information that you provide and perhaps a soft inquiry into your credit history. Soft inquiries don’t affect your credit score, so it’s unlikely that prequalification will either.

Because the prequalification process varies by lender, however, it’s impossible to say for sure that prequalification won’t impact your credit. If it does, the impact will be small and temporary.

Preapprovals are more rigorous than prequalifications and closer to what you’ll experience when you actually apply for a loan. Preapprovals often involve a hard credit inquiry, which does impact your credit. But again, any effect will be minor.

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How Do I Know If I’m a Good Candidate for a Personal Loan?

A personal loan application considers your existing debt and your ability to repay the loan. Your current employment will factor into how well suited you are to repay the loan, as will your credit score. In most cases, this means you need a good credit score to qualify for an unsecured personal loan at a low interest rate.

Lenders will also consider your debt-to-income (DTI) ratio — the ratio of your income to existing debt — and what kind of monthly payments you can afford.

If you can’t otherwise qualify because of a poor credit score, consider asking a close friend or family member to cosign your personal loan. Adding a cosigner with a good credit score to your application can help you get a lower interest rate on your loan.

Will You Prequalify for a SoFi Personal Loan?

Some nontraditional lenders, such as SoFi, look at other parts of a financial package when evaluating a candidate’s personal loan application.

SoFi considers additional factors such as your earning potential and cash flow after expenses. This means that even if you have a shorter credit history (because you just graduated college, for example), you may still qualify for a personal loan based on your education and career.

To find out whether you qualify for a SoFi personal loan, first go through the online prequalification process. This requires you to create an account and input your basic personal information, education, and employment history. It takes only a few minutes, after which SoFi will immediately show you which loan options you prequalify for.

After selecting a preliminary personal loan option, you’ll have to finalize your application by uploading documentation to verify your personal information. This may include pay stubs and bank statements. Once you’re approved, the loan is typically disbursed within a week.

The Takeaway

Wondering what it means to be prequalified vs. preapproved? You’re not alone. The terms may sound similar, but there are differences to be aware of.

Prequalification is often the first step of the loan application process, and it typically takes less time and requires fewer details from the borrower. Preapproval is the second step of the process. Here, you can see the size of the loan you could qualify for and the potential terms and interest rate. However, neither step guarantees that you’ll be approved for the loan.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Can you be denied a loan after being preapproved?

Yes. Preapproval does not guarantee final loan approval. Lenders may still deny a loan application if new information appears during the underwriting process, such as changes to your income, employment, debt levels, or credit history.

Is prequalification the same as applying for a loan?

Prequalification is an initial review based on basic financial information and usually involves a soft credit inquiry. A formal loan application is more detailed and may require documentation verification and a hard credit inquiry.

Does getting prequalified or preapproved affect your credit score?

Prequalification usually involves a soft credit inquiry and generally doesn’t affect your credit score. However, preapproval may require a hard credit inquiry, which can cause a small, temporary decrease in your score.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q226-062

Mutual fund investors generally pay taxes on the income or capital gains they see from their investments. But the specific mutual fund taxation depends on several variables.

Read on to learn how mutual funds are taxed, what investors should expect or anticipate when dealing with mutual funds and taxes, and some strategies for tax-efficient investing.

Quick Mutual Fund Overview

Mutual funds are pooled investment vehicles that allow individuals to invest in a professionally managed portfolio of stocks, bonds, and other securities. Mutual funds are managed by professional portfolio managers who use the pooled capital to buy and sell securities according to the fund’s stated investment objective. When investors buy into a mutual fund, they’re purchasing a spectrum of assets all at once.

Mutual funds can be actively managed, where the portfolio manager actively buys and sells securities in the fund, or passively managed, where the fund tracks an index.

Mutual funds are one popular way for individuals to diversify their portfolios and access professional investment management.

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Do You Pay Taxes on Mutual Funds?

When mutual funds are in a taxable account like a taxable brokerage account, mutual fund investors generally need to pay taxes on any income or capital gains the mutual fund distributes, including dividends, interest, and realized capital gains from the sale of securities within the fund.

It’s worth noting that mutual funds can be structured in different ways, and the tax treatment of mutual fund investments can vary depending on the specific type of mutual fund. For example, some mutual funds are classified as tax-exempt or tax-deferred, which means that they are not subject to certain taxes or that taxes on the income or gains from the fund are deferred until later.

When a mutual fund distributes income or capital gains to its investors, it must provide them with a Form 1099-DIV, which reports the distribution amount and any associated taxes. Investors are then responsible for reporting this income on their tax returns and paying any taxes that are due.

When Do You Pay Taxes on Mutual Funds?

Investors who hold mutual funds in a taxable account are required to pay taxes on mutual fund distributions. This is true whether the distributions are paid out in cash or reinvested. Mutual funds report distributions to their investors at the end of each calendar year.

Also, whenever an investor actively sells or buys shares, they must pay tax on any dividends or gains from those transactions.

How Are Mutual Funds Taxed?

Mutual funds are taxed based on the income and capital gains they generate and distribute to their investors. This income and capital gains can come from various sources, such as dividends on stocks held by the fund, interest on bonds held by the fund, and profits from the sale of securities within the fund.

The tax treatment of mutual fund investments can vary depending on the type of fund and the type of income or capital gains it generates. Here are some general rules to keep in mind.

Paying Tax on “Realized Gains” from a Mutual Fund

Shareholders may owe taxes on their mutual fund holdings even if they don’t sell shares of the fund. That’s because shareholders still generate income from those holdings, which are often called “realized gains”.

Mutual funds are often actively managed, meaning that a portfolio manager regularly makes decisions about what the fund contains by buying and selling investments — a process that can net profits. Those profits, or gains, are then passed back to shareholders as distributions (or as dividends) or reinvested in the fund.

When mutual fund shareholders are awarded distributions from funds, they see a “realized gain” from their investment. (This is also true for those who invest in exchange-traded funds (ETFs).) For that reason, shareholders may end up owing tax on investments that they have not sold or may have lost value over the year.

Paying Capital Gains on Mutual Funds

Many investors likely know that when they sell shares of a mutual fund, they’ll need to pay taxes on the earnings. Specifically, they’ll pay capital gains tax on the profit from selling an investment. The capital gains tax rate will vary depending on how long an investor holds the investment (short-term versus long-term).

Because funds contain investments that may be sold during the year, thereby netting capital gains, investors may be responsible for capital gains taxes on their mutual fund distributions. As each fund is different, so are the taxes associated with their distributions. So reading through the fund’s prospectus and any other available documentation can help investors figure out what, if anything, they owe.

Paying Taxes on Mutual Fund Dividends

Mutual funds may hold stocks or interest-bearing bonds that earn dividends. Because mutual funds are considered pass-through investments, they must pass along any dividend income they receive to investors. Investors are then required to pay tax on these dividends, even if they are reinvested.

How that tax is paid, as well as what the tax rate on them is, depends on whether the dividends are classified as ordinary or qualified dividends. Qualified dividends are taxed at a lower rate than ordinary dividends (see more detail below).

How Much Tax Do You Pay on Mutual Funds?

The amount of tax you may need to pay on mutual fund investments depends on the type of fund, the type of income or capital gains the fund generates, and your individual tax situation.

Here are some general rules to keep in mind:

•   Dividends: Dividends paid by mutual funds are taxed at different rates, depending on whether the payouts are ordinary or qualified dividends, as noted above. Qualified dividends are taxed at a lower rate than ordinary dividends; they’re taxed at the long-term capital gains rate, which ranges from 0% to 20%. In contrast, ordinary dividends are taxed at an investor’s ordinary income tax rate.

•   Interest: The tax on the interest income from mutual funds depends on whether the payout comes from tax-exempt bonds, federal debt, or regular fixed-income securities. Depending on the type of asset, the interest may be taxed at ordinary income tax rates or exempt from certain taxes.

•   Capital gains: When a mutual fund sells securities for a profit, it may realize a capital gain, which is subject to tax. The tax rate on capital gains depends on how long the securities were held and an investor’s tax bracket. Short-term capital gains (on securities held for one year or less) are taxed at the same rate as ordinary income. In comparison, long-term capital gains (on securities held for more than one year) are generally taxed at the lower capital gains tax rate.

How to Minimize Taxes on Mutual Funds

Here are a handful of ways to potentially lower taxable income associated with mutual funds.

Know the Details Before You Invest

Do your homework! The holdings and asset allocations in each fund and how they’re managed will ultimately play a significant role in the tax liabilities associated with each fund. Before investing in a specific mutual fund, it’s worth digging through the prospectus and other documents to understand what to expect.

For example, an investor can typically find out ahead of time if a mutual fund makes capital gains distributions or how often a fund pays out dividends. Those types of income-generating events will need to be declared to the IRS come tax time.

Some investors may look for tax-efficient funds specifically designed to help mutual fund investors avoid taxes.

Use a Tax-deferred Account

Some brokerage or investment accounts — including retirement accounts like IRAs and 401(k) plans — are tax-deferred. That means they grow tax-free until the money in them is withdrawn. In the short term, using these types of accounts to invest in mutual funds could help investors avoid any immediate tax liabilities that those mutual funds impose.

For example, investing in index funds through a Roth IRA allows for tax-free growth. And because an investor has already paid taxes on the money they contribute to the Roth IRA, their qualified withdrawals are also tax-free.

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Hang Onto Your Funds to Try and Avoid Short-term Capital Gains

If the goal is to minimize an investor’s tax liability, avoiding short-term capital gains tax is important. That’s because short-term capital gains taxes are steeper than the long-term variety. One way to help ensure that an investor is rarely on the hook for those short-term rates is to subscribe to a buy-and-hold investment strategy.

This can be applied as an overall investing strategy in addition to one tailor-made for avoiding additional tax liabilities on mutual fund holdings.

Consider Tax-Loss Harvesting Strategies

Tax-loss harvesting is a strategy an investor may use to sell assets in a taxable account that have lost value to help offset the capital gains tax they may owe on profits they’ve made. This could potentially help lower the amount of taxes the investor owes.

However, there are many IRS rules and restrictions regarding tax-loss harvesting that an investor needs to be aware of if they are considering this strategy. Because tax-harvesting is complex, investors may want to consult a tax professional.

Talk to a Financial Professional

Not every investor has the same resources, including time, available to them. That’s why some investors may choose to consult a financial advisor specializing in these services. They usually charge a fee, but some may offer free consultations. For some investors, the cost savings associated with solid financial advice can outweigh the initial costs of securing that advice.

How Do You Report Mutual Funds on Your Taxes?

If you own mutual funds, you will generally need to report any income or capital gains you receive from the fund on your tax return.

Mutual funds are required to provide their investors with a Form 1099-DIV, which reports the amount of any dividends, interest, and capital gains distributions the fund paid out during the year. Make sure to keep this form for your records and use it to help complete your tax return.

You will then need to report any dividends, interest, and capital gains distributions you received from your mutual fund on your tax return, specifically on IRS Form 1040 or Schedule D (Form 1040).

The Takeaway

Mutual fund taxes are generally unavoidable, but with a little planning, you might be able to minimize the amount you are taxed. Employing certain strategies may help you minimize your mutual fund taxes. For example, those investing for long-term financial goals, like retirement, can use tax-deferred accounts as their primary investing vehicles. And by using those accounts to invest in mutual funds and other assets, they can help offset their short-term tax liabilities.

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.

FAQ

When do you pay taxes on mutual funds?

An investor with mutual funds in a taxable account pays taxes on mutual funds each year that income or capital gains from the funds are distributed to shareholders. This includes interest, dividends, and realized capital gains from sales of securities in the fund. Also, when an investor actively sells or buys shares, they must pay tax on gains or dividends resulting from that.

Are mutual funds taxable if I do not sell them?

If the mutual funds are in a taxable brokerage account, they can still be taxable even if you don’t sell them. Here’s why: Mutual funds frequently buy and sell their underlying assets, and they are required to pass along distributions of interest, dividends, and realized capital gains from those transactions to shareholders.

If you have a tax-deferred account like a 401(k) or IRA, you typically won’t pay taxes on the distributions, but you will pay taxes when you withdraw money in retirement. But if you have a tax-exempt account like a Roth IRA, mutual fund distributions and capital gains are generally tax-free when you make qualified withdrawals in retirement.

How are mutual fund dividends taxed?

Mutual fund dividends are taxed at different rates, depending on whether they are ordinary or qualified dividends. Qualified dividends are taxed at the lower long-term capital gains rate, which ranges from 0% to 20%. Ordinary dividends are taxed at an investor’s ordinary income tax rate, which may be higher, depending on an investor’s tax bracket.

What is the mutual fund tax trap?

The mutual fund tax trap typically refers to when an investor is required to pay taxes on assets bought and sold by the fund itself. Any distributions resulting from those transactions must be passed along to investors, who are then required to pay taxes on them if the fund is in a taxable account. One way to help avoid this is for an investor to consider putting the mutual fund in a tax-advantaged account like an IRA.

Do I pay taxes on reinvested mutual fund distributions?

Investors are generally required to pay taxes on all mutual fund distributions in a taxable account, including distributions that are reinvested. These distributions are treated as taxable income by the IRS. An investor who owes taxes on mutual fund distributions, including reinvested distributions, will receive tax Form 1099-DIV from the mutual fund.