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Q: Are There Investment Plans for Children?

Yes, there are a number of investment plans for kids these days. Depending on your child’s age, you may want to open different accounts at different times.

Jan

2026

Creating an Investment Plan for Your Child

By Austin Kilham | Family Finances, invest, Investing | No Comments

From saving for college to getting a leg up on retirement, creating an investment plan for your child just makes sense. Why? Because when your kids are young, time is on their side in a really big way and it’s only smart to take advantage of it.

In addition, there are several different avenues to consider when setting up an investment plan for your kids. Each one potentially can help set them up for a stronger financial future.

🛈 SoFi currently does not offer custodial banking or investment products.

Why Invest for Your Child?

There’s a reason for the cliché, “Time is money.” The power of time combined with money may help generate growth over time.

The technical name for the advantageous combination of time + money is known as compound interest or compound growth. That means: when money earns a bit of interest or investment gains over time, that additional money also grows and the investment can slowly snowball.

Example of Compounding

Here is a simple example: If you invest $1,000, and it earns 5% per year, that’s $50 ($1,000 x 0.05 = $50). So at the end of one year you’d have $1,050.

That’s when the snowball slowly starts to grow: Now that $1,050 also earns 5%, which means the following year you’d have $1,152.50 ($1,050 x 0.05 = $52.50 + $1,050).

And that $1,152.50 would earn 5% the following year… and so on. You get the idea. It’s money earning more money.

That said, there are no guarantees any investment will grow. It’s also possible an investment can lose money. But given enough time, an investment plan you make for your child has time to recover if there are any losses or volatility over the years.

Benefits of Investing for Your Child Early On

There are other benefits to investing for your kids when they’re young. In addition to the potential snowball effect of compounding, you have the ability to set up different types of investment plans for your child to capture that potential long-term growth.

Each type of investment plan or savings account can help provide resources your child may need down the road.

• You can fund a college or educational savings plan.

• You can open an IRA for your child (individual retirement account).

• You can set up a high-yield savings account, or certificate of deposit (CD).

Even small deposits in these accounts can benefit from potential growth over time, helping to secure your child’s financial future in more than one area. And what parent doesn’t want that?

Are Gifts to Children Taxed?

The IRS does have rules about how much money you can give away before you’re subject to something called the gift tax. But before you start worrying if you’ll have to pay a gift tax on the $100 bill you slipped into your niece’s graduation card, it’s important to know that the gift tax generally only affects large gifts.

This is because there is an “annual exclusion” for the gift tax, which means that gifts up to a certain amount are not subject to the gift tax. For 2025 and 2026, it’s $19,000 per year; if you and your spouse both give money to your child (or anyone), the annual exclusion is $38,000.

That means if you’re married, you can give financial gifts up to $38,000 per recipient in 2025 and 2026 without needing to report that gift to the IRS.

Also, the recipient of the gift, in this case your child, will not owe any tax.

Are There Investment Plans for Children?

Yes, there are a number of investment plans parents can open for kids these days. Depending on your child’s age, you may want to open different accounts at different times. If you have a minor child or children, you would open custodial accounts that you hold in their name until they are legally able to take over the account.

Investing for Younger Kids

One way to seed your child’s investing plan is by opening a custodial brokerage account, established through the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA).

While the assets belong to the minor child until they come of age (18 to 21, depending on the state), they’re managed by a custodian, often the parent. But opening and funding a custodial account can be a way to teach your child the basics of investing and money management.

There are no limits on how much money parents or other relatives can deposit in a custodial account, though contributions over $19,000 per year ($38,000 for married couples) would exceed the gift tax exclusion and need to be reported to the IRS.

UGMA and UTMA custodial accounts have different rules than, say, 529 plans. Be sure to understand how these accounts work before setting one up.

Investing for Teens

Teenagers who are interested in learning more about money management as well as investing have a couple of options.

• Some brokerages also offer accounts for minor teens. The money in the account is considered theirs, but these are custodial accounts and the teenager doesn’t take control of the account until they reach the age of majority in their state (either 18 or 21).

These accounts can be supervised by the custodian, who can help the child make trades and learn about investing in a hands-on environment.

• If your teenager has earned income, from babysitting or lawn mowing, you can also set up a custodial Roth IRA for your child. (If a younger child has earned income, say, from work as a performer, they can also fund a Roth IRA.)

Opening a Roth IRA offers a number of potential benefits for kids: top of the list is that the money they save and invest within the IRA has years to grow, and can provide a tax-free income stream in retirement.

Recommended: Paying for College: A Parents’ Guide

Starting a 529 Savings Plan

Saving for a child’s college education is often top of mind when parents think about planning for their kids’ futures.

A 529 plan is a tax-advantaged savings plan that encourages saving for education costs by offering a few key benefits. In some states you can deduct the amount you contribute to a 529 plan. But even if your state doesn’t allow the tax deduction, the money within a 529 plan grows tax free, and qualified withdrawals are also tax free.

That includes money used to pay for tuition, room and board, lab fees, textbooks, and more. Qualified withdrawals can be used to pay for elementary, secondary, and higher education expenses, as well as qualified loan repayments, and some apprenticeship expenses. (Withdrawals that are used for non-qualified expenses may be subject to taxes and a penalty.)

Though all 50 states sponsor 529 plans you’re not required to invest in the plan that’s offered in your home state — you can shop around to find the plan that’s the best fit for you. You and your child will be able to use the funds to pay for education-related expenses in whichever state they choose.

Other Ways to Invest for Education

Given the benefits of investing for your child’s education, there are additional options to consider.

Prepaid Tuition Plans

A prepaid tuition plan allows you to prepay tuition and fees at certain colleges and universities at today’s prices. Such plans are usually available only at public schools and for in-state students, but some can be converted for use at out-of-state or private colleges.

The main benefit of this plan is that you could save big on the price of college by prepaying before prices go up. One of the main disadvantages is that, with some exceptions, these funds only cover tuition costs (not room and board, for example).

Education Savings Plans

An education savings plan or ESA is similar to a 529 plan, in that the money saved grows tax free and can be withdrawn tax free to pay for qualified educational expenses for elementary, secondary, and higher education.

ESAs, however, come with income caps. Single filers with a modified adjusted gross income (MAGI) over $110,000, and married couples filing jointly who have a MAGI over $220,000 cannot contribute to an ESA.
ESAs also come with contribution limits: You can only contribute up to $2,000 per year, per child, and ESA contributions are only allowed up to the beneficiary’s 18th birthday, unless they’re a special needs student.

And while many states offer a tax deduction for contributing to a 529 plan, that’s not the case with ESA contributions; they are not tax deductible at the federal or the state level.

Investing Your Education Funds

Once you make contributions to an educational account, you can invest your funds. You will likely have a range of investment options to choose from, including mutual funds and exchange-traded funds (ETFs), which vary from state to state.

Many plans also offer the equivalent of age-based target-date funds, which start out with a more aggressive allocation (e.g. more in stocks), and gradually dial back to become more conservative as college approaches.

Depending on your child’s level of interest, this could be an opportunity to have them learn more about the investing process.

Thinking Ahead to Retirement Accounts

It’s worth knowing that as soon as your child is working, you are able to open a custodial Roth IRA, as discussed above. The assets inside the IRA belong to your child, but you have control over investing them until they become an adult.

While it’s possible to open a custodial account for a traditional IRA, most minor children won’t reap the tax benefits of this type of IRA. Most children don’t need tax-deductible contributions to lower their taxable income.

For that reason, it may make more sense to set up a custodial Roth IRA for your child, assuming the child has earned income. A Roth can offer tax-free income in retirement, assuming the withdrawals are qualified.

When to Choose a Savings Account for Your Child

Investing is a long-term proposition. Investing for long periods allows you to take advantage of compounding, and may help you ride out the volatility may occur in the stock market. But sometimes you want a safer place to keep some cash for your child — and that’s when opening a savings account is appropriate.

If you think you’ll need the money you’re saving for your child in the next three to five years, consider putting it in a high-yield savings account, which offers higher interest rates than traditional savings accounts.

You might also want to consider a certificate of deposit (CD), which also offers higher interest rates than traditional saving vehicles. The only catch with CDs is that in exchange for this higher interest rate, you essentially agree to keep your money in the CD for a set amount of time, from a few months to a few years.

While these savings vehicles don’t offer the same high rates of return you might find in the market, they are a less risky option and offer a steady rate of return.

The Takeaway

When considering your long-term goals for your child, having an investing plan might make sense. Whether you want to save for college, help your child get ahead on retirement, or just set up a savings account for your kids, now is the time to start. In fact, the sooner the better, as time can help money grow (just as it helps children grow!).

FAQ

Can a child have an investment account?

A parent or other adult can open a custodial brokerage account for a minor child or a teenager. While the custodian manages the account, the funds belong to the child, who gains control over the account when they reach the age of majority in their state (18 or 21).

What is the best way to invest money for a child?

The best way is to get started sooner rather than later. Perhaps start with one goal — i.e. saving for college — and open a 529 plan. Or, if your child has earned income from a side job, you can open a custodial Roth IRA for them.

What is a good age to start investing as a kid?

When your child shows an interest in investing, or when they have a specific goal, whether that’s at age 7 or 17, that’s when you’ll have a willing participant. Ideally you want to invest when they’re younger, so time can work in your favor.

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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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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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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Jan

2026

Roth 401(k) vs Traditional 401(k): Which Is Best for You?

By AJ Smith | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A traditional 401(k) and a Roth 401(k) are tax-advantaged retirement plans that can help you save for retirement. While both types of accounts follow similar rules — they have the same contribution limits, for example — the impact of a Roth 401(k) vs. traditional 401(k) on your tax situation, now and in the future, may be quite different.

In brief: The contributions you make to a traditional 401(k) are deducted from your gross income, and thus may help lower your tax bill. But you’ll owe taxes on the money you withdraw later for retirement.

Conversely, you contribute after-tax funds to a Roth 401(k) and can typically withdraw the money tax free in retirement — but you don’t get a tax break now.

To help choose between a Roth 401(k) vs. a traditional 401(k) — or whether it might make sense to invest in both, if your employer offers that option — it helps to know what these accounts are all about.

Key Points

• Traditional 401(k) contributions are made with pre-tax dollars, reducing taxable income for the year of contribution.

• Roth 401(k) contributions are made with after-tax dollars, offering tax-free withdrawals in retirement.

• Withdrawals from traditional 401(k)s are taxed as income, whereas Roth 401(k) withdrawals are tax-free if rules are followed.

• Early withdrawals from both accounts may incur taxes and penalties, though Roth contributions can be withdrawn tax-free.

• Starting January 2024, Roth 401(k)s are not subject to required minimum distributions, unlike traditional 401(k)s.

5 Key Differences Between Roth 401(k) vs Traditional 401(k)

Before deciding on a Roth 401(k) or traditional 401(k), it’s important to understand the differences between each account, and to consider the tax benefits of each in light of your own financial plan. The timing of the tax advantages of each type of account is also important to weigh.

1. How Each Account is Funded

• A traditional 401(k) allows individuals to make pre-tax contributions. These contributions are typically made through elective salary deferrals that come directly from an employee’s paycheck and are deducted from their gross income.

• Employees contribute to a Roth 401(k) also generally via elective salary deferrals, but they are using after-tax dollars. So the money the employee contributes to a Roth 401(k) cannot be deducted from their current income.

💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA account and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

2. Tax Treatment of Contributions

• The contributions to a traditional 401(k) are tax-deductible, which means they can reduce your taxable income now, and they grow tax-deferred (but you’ll owe taxes later).

• By contrast, since you’ve already paid taxes on the money you contribute to a Roth 401(k), the money you contribute isn’t deductible from your gross income, and withdrawals are generally tax free (some exceptions below).

3. Withdrawal Rules

• You can begin taking qualified withdrawals from a traditional 401(k) starting at age 59 ½, and the money you withdraw is taxed at ordinary income rates.

• To withdraw contributions + earnings tax free from a Roth 401(k) you must be 59 ½ and have held the account for at least five years (often called the 5-year rule). If you open a Roth 401(k) when you’re 57, you cannot take tax-free withdrawals at 59 ½, as you would with a traditional 401(k). You’d have to wait until five years had passed, and start tax-free withdrawals at age 62.

4. Early Withdrawal Rules

• Early withdrawals from a 401(k) before age 59 ½ are subject to tax and a 10% penalty in most cases, but there are some exceptions where early withdrawals are not penalized, including certain medical expenses; a down payment on a first home; qualified education expenses.

You may also be able to take a hardship withdrawal penalty-free, but you need to meet the criteria, and you would still owe taxes on the money you withdrew.

• Early withdrawals from a Roth 401(k) are more complicated. You can withdraw your contributions at any time, but you’ll owe tax proportional to your earnings, which are taxable when you withdraw before age 59 ½.

For example: If you have $100,000 in a Roth 401(k), including $90,000 in contributions and $10,000 in taxable gains, the gains represent a 10% of the account. Therefore, if you took a $20,000 early withdrawal, you’d owe taxes on 10% to account for the gains, or $2,000.

5. Required Minimum Distribution (RMD) Rules

With a traditional 401(k), individuals must take required minimum distributions starting at age 73, or face potential penalties. While Roth 401(k)s used to have RMDs, as of January 2024, they no longer do. That means you are not required to withdraw RMDs from a Roth 401(k) account.

For a quick side-by-side comparison, here are the key differences of a Roth 401(k) vs. traditional 401(k):

Traditional 401(k)	Roth 401(k)
Funded with pre-tax dollars.	Funded with after-tax dollars.
Contributions are deducted from gross income and may lower your tax bill.	Contributions are not deductible.
All withdrawals taxed as income.	Withdrawals of contributions + earnings are tax free after 59 ½, if you’ve had the account for at least 5 years. (However, matching contributions from an employer made with pre-tax dollars are subject to tax.)
Early withdrawals before age 59 ½ are taxed as income and are typically subject to a 10% penalty, with some exceptions.	Early withdrawals of contributions are not taxed, but earnings may be taxed and subject to a 10% penalty.
Account subject to RMD rules starting at age 73.	No longer subject to RMD rules as of January 2024.

Bear in mind that a traditional 401(k) and Roth 401(k) also share many features in common:

• The annual contribution limits are the same for a 401(k) and a Roth 401(k). For 2025, the total amount you can contribute to these employer-sponsored accounts is $23,500; if you’re 50 and older you can save an additional $7,500 for a total of $31,000. The 2026 limit is capped at $24,500; $32,500 if you’re 50 and older. Those aged 60 to 63 may contribute a total of $34,750 in 2025 and $35,750 in 2026, thanks to SECURE 2.0.

• For both accounts, employers may contribute matching funds up to a certain percentage of an employee’s salary.

• In 2025, total contributions from employer and employee cannot exceed $70,000 ($77,500 for those 50 and up, and $81,250 for those 60 to 63). In 2026, total contributions from employer and employee cannot exceed $72,000 ($80,000 for those 50 and up, and $83,250 for those 60 to 63).

• Employees may take out a loan from either type of account, subject to IRS restrictions and plan rules.

Because there are certain overlaps between the two accounts, as well as many points of contrast, it’s wise to consult with a professional when making a tax-related plan.

How to Choose Between a Roth and a Traditional 401(k)

In some cases it might make sense to contribute to both types of accounts (more on that below), but in other cases you may want to choose either a traditional 401(k) or a Roth 401(k) to maximize the specific advantages of one account over another. Here are some considerations.

When to Pay Taxes

Traditional 401(k) withdrawals are taxed at an individual’s ordinary income tax rate, typically in retirement. As a result these plans can be most tax efficient for those who will have a lower marginal rate after they retire than they did while they were working.

In other words, a traditional 401(k) may help you save on taxes now, if you’re in a higher tax bracket — and then pay lower taxes in retirement, when you’re ideally in a lower tax bracket.

On the other hand, an investor might look into the Roth 401(k) option if they feel that they pay lower taxes now than they will in retirement. In that case, you’d potentially pay lower taxes on your contributions now, and none on your withdrawals in retirement.

Your Age

Often, younger taxpayers may be in a lower tax bracket. If that’s the case, contributing to a Roth 401(k) may make more sense for the same reason above: because you’ll pay a lower rate on your contributions now, but then they’re completely tax free in retirement.

If you’re older, perhaps mid-career, and in a higher tax bracket, a traditional 401(k) might help lower your tax burden now (and if your tax rate is lower when you retire, even better, as you’d pay taxes on withdrawals but at a lower rate).

Where You Live

The tax rates where you live, or where you plan to live when you retire, are also a big factor to consider. Of course your location some years from now, or decades from now, can be difficult to predict (to say the least). But if you expect that you might be living in an area with lower taxes than you are now, e.g. a state with no state taxes, it might make sense to contribute to a traditional 401(k) and take the tax break now, since your withdrawals may be taxed at a lower rate.

The Benefits of Investing in Both a Roth 401(k) and Traditional 401(k)

If an employer offers both a traditional and Roth 401(k) options, employees might have the option of contributing to both, thus taking advantage of the pros of each type of account. In many respects, this could be a wise choice.

Divvying up contributions between both types of accounts allows for greater flexibility in tax planning down the road. Upon retirement, an individual can choose whether to withdraw money from their tax-free 401(k) account or the traditional, taxable 401(k) account each year, to help manage their taxable income.

It is important to note that the $23,000 contribution limit ($30,500 for those 50 and older) for 2024 is a total limit on both accounts.

So, for instance, you might choose to save $13,500 in a traditional 401(k) and $9,500 in a Roth 401(k) for the year. You are not permitted to save $23,000 in each account.

What’s the Best Split Between Roth and Traditional 401(k)?

The best split between a Roth 401(k) and a traditional 401(k) depends on your individual financial situation and what might work best for you from a tax perspective. You may want to do an even split of the $23,500 limit you can contribute in 2025 or the $24,500 you can contribute in 2026. Or, if you’re in a higher tax bracket now than you expect to be in retirement, you might decide that it makes more sense for you to put more into your traditional 401(k) to help lower your taxable income now. But if you expect to be in a higher income tax bracket in retirement, you may want to put more into your Roth 401(k).

Consider all the possibilities and implications before you decide. You may also want to consult a tax professional.

The Takeaway

Employer-sponsored Roth and traditional 401(k) plans offer investors many options when it comes to their financial goals. Because a traditional 401(k) can help lower your tax bill now, and a Roth 401(k) generally offers a tax-free income stream later — it’s important for investors to consider the tax advantages of both, the timing of those tax benefits, and whether these accounts have to be mutually exclusive or if it might benefit you to have both.

When it comes to retirement plans, investors don’t necessarily have to decide between a Roth or traditional 401(k). Some might choose one of these investment accounts, while others might find a combination of plans suits their goals. After all, it can be difficult to predict your financial circumstances with complete accuracy — especially when it comes to tax planning — so you may decide to hedge your bets and contribute to both types of accounts, if your employer offers that option.

Another step to consider is a 401(k) rollover, where you move funds from an old 401(k) into an IRA. When you do a 401(k) rollover it can help you manage your retirement funds.

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.

Easily manage your retirement savings with a SoFi IRA.

FAQ

Is it better to contribute to 401(k) or Roth 401(k)?

Whether it’s better to contribute to a traditional 401(k) or Roth 401(k) depends on your particular financial situation. In general, if you expect to be in a lower tax bracket in retirement, a traditional 401(k) may make more sense for you since you’ll be able to deduct your contributions when you make them, which can lower your taxable income, and then pay taxes on the money in retirement, when you’re in a lower income tax bracket.

But if you’re in a lower tax bracket now than you think you will be later, a Roth 401(k) might be the preferred option for you because you’ll generally withdraw the money tax-free in retirement.

Can I max out both 401(k) and Roth 401(k)?

No, you cannot max out both accounts. Per IRS rules, the annual 401(k) limits apply across all your 401(k) accounts combined. So for 2025, you can contribute a combined amount up to $23,500 ($31,000 if you’re 50 or older, or $34,750 if you’re 60 to 63), to your Roth 401(k) and your traditional 401(k) accounts. For 2026, you can contribute $24,500 ($32,500 if you’re 50 or older, or $35,750 if you’re 60 to 63) to both 401(k) accounts.

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.

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.

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.

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

Jan

2026

Stock Buyback: Why Do Companies Buy Back Stocks?

By Michael Flannelly | Growing Wealth, invest, Investing, Terminology | No Comments

Table of Contents

What Is A Stock Buyback?
How Do Companies Buy Back Stock?
Why Do Companies Buy Back Stock?
What Happens to Repurchased Stock?
The Pros and Cons of a Stock Buyback for Investors
FAQ

One of the most popular ways a company can use its cash is through a stock buyback. Over the past five years, according to S&P Dow Jones Indices, big companies have spent trillions repurchasing their own shares to boost shareholder value. Because of this significant activity, investors need to know the basics of stock buybacks and how they work to feel confident in making investment decisions.

Key Points

• Stock buybacks reduce the number of outstanding shares, increasing ownership value for remaining shareholders.

• Companies execute buybacks via open market purchases or tender offers, often at a premium.

• Buybacks can enhance financial ratios and investor returns, potentially making the company more attractive.

• Tax benefits may arise from capital gains rates, which are typically lower than income tax rates on ordinary dividends.

• Potential drawbacks could include opportunity costs, since the capital used to buy back stock could alternatively be spent on growth, as well as the potential for the share price to fall instead of rise.

What Is A Stock Buyback?

A stock buyback, also known as a share repurchase, is when a company buys a portion of its previously issued stock, reducing the total number of outstanding shares on the market. Because there are fewer total shares on the market after the buyback, each share owned by investors represents a greater portion of company ownership.

How Do Companies Buy Back Stock?

Companies can repurchase stock from investors through the open market or a tender offer.

Open Market

A company may buy back shares on the open market at the current market price, just like a regular investor would. These stock purchases are conducted with the company’s brokers.

Tender Offers

A company may also buy back shares through a tender offer. One type of tender offer, the fixed-price offer, occurs when a company proposes buying back shares from investors at a fixed price on a specific date. This process usually values the shares at a higher price than the current price per share on the open market, providing an extra benefit to shareholders who agree to sell back the shares.

Another type of tender offer, the dutch auction offer, will specify to investors the number of shares the company hopes to repurchase and a price range. Shareholders can then counter with their own proposals, which would include the number of shares they’re willing to give up and the price they’re asking. When the company has all of the shareholders’ offers, it decides the right mix to buy to keep its costs as low as possible.

Why Do Companies Buy Back Stock?

Stock buybacks are one of several things a company can do with the cash it has in its coffers, including paying the money out to shareholders as a dividend, reinvesting in business operations, acquiring another company, and paying off debt. There are several reasons why a company chooses to buy back its stock rather than some of these other options.

1. Potentially Increases Stock Value

One of the most common reasons a company might conduct a share buyback is to increase the value of the stock, especially if the company considers its shares undervalued. By reducing the supply of shares on the market, the stock price will theoretically go up as long as the demand for the stock remains the same. The rising stock price benefits existing shareholders.

2. It Could Put Money Into Shareholders’ Hands

A company’s stock buyback program can be used as an alternative to dividend payments to return cash to shareholders, specifically those investors who choose to sell back their shares to the company. With dividend payments, companies usually pay them regularly to all shareholders, so investors may not like it if a company reduces or suspends a dividend. Stock buybacks, in contrast, are conducted on a more flexible basis that may benefit the company because investors do not rely on the payments.

3. Takes Advantage of Tax Benefits

Many investors prefer that companies use excess cash to repurchase stock rather than pay out dividends because buybacks may have fewer direct tax implications. With dividends, investors must pay taxes on the payout. But with stock buybacks, investors benefit from rising share prices but do not have to pay a tax on this benefit until they sell the stocks. And even when they sell the stock, they usually pay a lower capital gains tax rate.

4. Offsets Dilution From Stock Options

Companies will often offer employee stock options as a part of compensation packages to their employees. When these employees exercise their stock, the number of shares outstanding increases. To maintain an ideal number of outstanding shares after employees exercise their options, a company may buy back shares from the market.

5. Improves Financial Ratios

Another way stock buybacks attract more investors is by making the company’s financial ratios look much more attractive. Because the repurchases decrease assets on the balance sheet and reduce the number of outstanding shares, it can make financial ratios like earnings per share (EPS), the price-to-earnings ratio (PE Ratio), and return on equity (ROE) look more attractive to investors.

What Happens to Repurchased Stock?

When a company repurchases stock, the shares will either be listed as treasury stock or the shares will be retired.

Treasury stocks are the shares repurchased by the issuing company, reducing the number of outstanding shares on the open market. The treasury stock remains on its balance sheet, though it reduces the total shareholder equity.

Shares that are listed as treasury stock are no longer included in EPS calculations, do not receive dividends, and are not part of the shareholder voting process. However, the treasury stock is still considered issued and, therefore, can be reissued by the company through stock dividends, employee compensation, or capital raising.

In contrast, retired shares are canceled and cannot be reissued by the company.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

The Pros and Cons of a Stock Buyback for Investors

When a company announces a stock buyback, investors may wonder what it means for their investment. Stock buybacks have pros and cons worth considering depending on the company’s underlying reasoning for the share repurchase and the investor’s goal.

Pros of a Stock Buyback

There are some potential pros to a stock buyback.

Tender Offer Premium

Investors who accept the company’s tender offer could have an opportunity to sell the stock at a greater value than the market price.

Potential For an Increased Total Return

Investors who hold onto the stock after a buyback will likely see a higher share price since fewer outstanding shares are on the market. Plus, each share now represents a more significant portion of company ownership, which may mean an investor will see higher dividend payments over time. A higher stock price and increased dividend boosts an investor’s total return on investment.

Tax Benefits

As mentioned above, a stock buyback might also mean a lower overall tax burden for an investor, depending on how long the investor owned the stock. Money earned through a stock market buyback is taxed at the capital gains tax rate. If the company issued a dividend instead of buying back shares, the dividends would be taxed as regular income, typically at a higher rate.

Cons of a Stock Buyback

Buybacks also have some potential drawbacks.

Other Potential Uses for Cash

As mentioned above, when companies have cash, they can either reinvest in business operations, acquire a company, pay down debt, pay out a dividend, or buy back stock. Engaging in a share repurchase can starve the business of money needed in other areas, such as research and development or investment into new products and facilities. This hurts investors by boosting share price in the short term at the expense of the company’s long-term prospects.

Poor Timing

Companies may sometimes perform a stock buyback when their stocks are overvalued. Like regular investors, companies want to buy the stock when the shares are valued at an attractive price. If the company buys at a high stock price, it could be a bad investment when the company could have spent the money elsewhere.

Buybacks Could Benefit Executives, Not Shareholders

Stock buybacks might also be a convenient tactic to benefit company executives, who are often compensated by way of stock options. Also, some executives earn bonuses for increasing key financial ratios like earnings per share, so buying back stock to improve those ratios potentially benefits insiders and not all shareholders.

It’s also worth noting that as a part of the Inflation Reduction Act of 2022, some stock buybacks executed by public companies incur an excise tax of 1%, effectively making them more expensive.

The Takeaway

Like almost everything else to do with the stock market, the benefits and drawbacks of stock buybacks aren’t exactly straightforward. Investors need to ask themselves a few questions when analyzing the share repurchases of a company, like “why is the company conducting the buyback?” and “does the company have a history of delivering good returns?” Answering these questions can help investors decide whether a stock buyback is the best thing for a company.

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FAQ

Is a stock buyback positive or negative?

Stock buybacks have advantages and disadvantages for investors and companies. For instance, buybacks may increase the stock value and increase dividend payments to shareholders over time. However, stock buybacks may not be the best way for a company to spend its money in the long-term, and they may potentially benefit company executives more than shareholders.

When should a company do a stock buyback?

A company may do a stock buyback when it has the cash available and wants to increase the value of the stock, improve financial ratios, consolidate ownership, or drive demand for the stock.

Do I lose my shares in a buyback?

You won’t lose your shares in a buyback unless you want to sell them. The way a buyback works is that a company buys back stock from any investors who want to sell it. But you are under no obligation to sell your stock back to the company — it’s up to you whether to keep your stock or sell it back.

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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.

SOIN-Q425-025

Jan

2026

Two people cheers with wine by a fire pit outside a modern A-frame cabin while discussing the best states to retire in.

2025 Best States to Retire in for Tax Purposes

By Laurel Tincher | Life & Career, Preparing for Retirement, relay | Comments Off

Many people consider relocating when they retire to reduce their cost of living and make their savings last longer. When weighing the pros and cons of moving to another state, it’s important to consider the total tax burden there, including state and local taxes on retirement income, property tax, even sales tax. Some areas with a lower tax burden have a higher overall cost of living, which can cancel out any savings.

Below we look at the best states to retire in for taxes and how to tell if moving will be worth it.

Table of Contents

Most Tax-Friendly States for Retirement
Factors to Consider When Choosing the Best State to Retire In
States to Avoid When Retiring
The Best States to Retire in 2026
States with the Lowest Tax Burden
States With the Most Millionaires
Does It Make Financial Sense to Relocate in Retirement?
Pros and Cons of Relocating for Tax Benefits
FAQ

Key Points

• Several states, including Alaska, Florida, and Texas, do not tax 401(k) income, making them attractive for retirees.

• Mississippi, Tennessee, Wyoming, and others are among the most tax-friendly states for retirees.

• States like Hawaii, Massachusetts, and California have high living costs, which can offset tax benefits.

• Safety, healthcare access, family proximity, and lifestyle preferences are crucial in choosing a retirement destination.

• Lower taxes may not always outweigh the high cost of living in certain states.

Most Tax-Friendly States for Retirement

A number of states exempt Social Security income from state taxes. A smaller number offer a tax break on other retirement income, such as IRAs and 401(k) plans, private pensions, interest, dividends, and capital gains.

These are the 10 tax-friendly states for retirees, according to Kiplinger:

1. Mississippi

2. Tennessee

3. Wyoming

4. Nevada

5. Florida

6. South Dakota

7. Iowa

8. Pennsylvania

9. Alaska

10. Texas

But before you complete that change of address card, you’ll want to look at the bigger picture.

Factors to Consider When Choosing the Best State to Retire In

When choosing where to retire, it’s wise to first consider issues like safety, access to healthcare, distance to friends and family, or living near other people of retirement age.

Make a list of features that are important to you in a retirement locale, and consider whether any of them could indirectly impact your cost of living, such as being close to friends and family.

Then look at the total cost of living in an area: housing, food, transportation, cultural activities, and other expenses. These retirement expenses generally have a bigger impact on one’s lifestyle than taxes.

Finally, to determine whether a state is tax-friendly for retirees, look at the following:

Does the State Tax Social Security?

Generally, Social Security income is subject to federal tax. But some states also tax Social Security above a certain income threshold, while other states offer tax exemptions for individuals in lower tax brackets.

For the 2025 tax year, the states that tax some or all Social Security benefits are Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.

Does the State Tax Pensions?

Many states tax income from pensions, but 15 states do not. These states are: Alabama, Alaska, Florida, Hawaii, Illinois, Iowa, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming.

And these 13 states do not tax income from 401(k) plans: Alaska, Florida, Illinois, Iowa, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Alaska, Florida, Nevada, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax.

Other Taxes That Affect Retirees

When choosing the best state for you to retire in, it’s a good idea to look into sales tax and property taxes too. States that don’t charge sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon. On the other hand, New Hampshire has very high property taxes, reducing the benefit of no sales tax.

Recommended: When to Start Saving for Retirement

States to Avoid When Retiring

Choosing the best state to retire in sometimes means making compromises. If safety and healthcare access are top priorities, for instance, you may not get your ideal weather. But for many retirees, a high cost of living is a deal-breaker.

Here are the 10 states with the highest annual cost of living, according to a 2025 analysis conducted by GOBankingRates:

1. Hawaii: $144,436

2. Massachusetts: $112,752

3. California: $111,901

4. Alaska: $95,673

5. New York: $95,286

6. Maryland: $89,104

7. New Jersey: $88,563

8. Vermont: $88,408

9. Washington: $88,254

10. New Hampshire: $87,017

Recommended: Avoid These 12 Retirement Mistakes

The Best States to Retire in 2026

As noted above, the best state to retire in will depend on an individual or couple’s budget, lifestyle, and values. But recent trends may help point you in the right direction.

These are the top 10 states that retirees are moving to, according to United Van Lines’ 2024 National Movers Study:

1. West Virginia

2. Delaware

3. South Carolina

4. Washington, D.C.

5. North Carolina

6. Alabama

7. Rhode Island

8. Oregon

9. Arkansas

10. Arizona

If cost of living is your sole concern, the following are the 10 least expensive states, according to Bankrate:

1. West Virginia

2. Pennsylvania

3. Delaware

4. Wyoming

5. Ohio

6. Wisconsin

7. Nevada

8. Indiana

9. Idaho

10. Georgia

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States with the Lowest Tax Burden

An area’s total tax burden is the sum of all property taxes, sales taxes, excise taxes (which affect the price of goods), and individual income taxes. Below are the states with the lowest total tax burden for retirees. (On a budget? Tools like an online budget planner can help you monitor spending and make progress toward your financial goals.)

Rank	State	Total Tax Burden
1	Alaska	4.9%
2	Wyoming	5.8%
3	New Hampshire	5.9%
4	Tennessee	6.4%
5	Florida	6.5%
6	Delaware	6.5%
7	South Dakota	6.5%
8	North Dakota	6.6%
9	Oklahoma	7%
10	Idaho	7.5%

States With the Most Millionaires

One way to measure the overall desirability of an area is the number of millionaires who live there. After all, millionaires can afford to live in states that have high-quality healthcare, nice weather, and diverse cultural offerings. These are not the cheapest states in terms of cost of living or taxes, but their popularity may help non-millionaires reevaluate their must-haves vs. nice-to-haves.

Rank	State	% of Millionaire Households
1	New Jersey	9.76%
2	Maryland	9.72%
3	Connecticut	9.44%
4	Massachusetts	9.38%
5	Hawaii	9.20%
6	District of Columbia	9.12%
7	California	8.51%
8	New Hampshire	8.47%
9	Virginia	8.31%
10	Alaska	8.18%
Source: Statista

Does It Make Financial Sense to Relocate in Retirement?

For workers who already live in a state with moderate taxes, are near family, and have a lifestyle they enjoy and can afford, there may not be any compelling reason to move. But for those looking to make a change or lower their retirement expenses, it may make financial sense to relocate.

Just remember that housing, food, transportation, and other expenses usually have a bigger impact on one’s retirement lifestyle than taxes.

Pros and Cons of Relocating for Tax Benefits

Lower taxes alone may not be enough to motivate someone to pick up and move house. Other factors should also support the decision.

Pros of Relocating for Tax Benefits

• Potentially lower cost of living

• Discovering a community of like-minded retirees

• Possibly ticking off other boxes on your list

Cons of Relocating for Tax Benefits

• Other living costs may cancel out the tax benefits

• Moving costs are high, and the stress can be tough

• Need to find another home

The Takeaway

The best state to retire in for tax purposes depends on an individual’s budget, lifestyle, and values. Some states with lower taxes for retirees can have higher housing and transportation costs, canceling out any tax benefit. A financial advisor can help you decide if saving on taxes is worth the expense and trouble of relocating.

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.

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FAQ

What are the 3 states that don’t tax retirement income?

Nine states don’t tax retirement plan income because they have no state income taxes at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Those states, along with Illinois, Iowa, Mississippi, and Pennsylvania, don’t tax distributions from 401(k) plans, IRAs, or pensions. Alabama and Hawaii don’t tax pensions, but do tax distributions from 401(k) plans and IRAs.

Which state is the best state to live in for tax purposes?

Alaska has the lowest overall tax rates.

Which states do not tax your 401k when you retire?

Alaska, Florida, Illinois, Iowa, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming do not tax 401(k) plans when you retire.

Photo credit: iStock/Jeremy Poland

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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.

SORL-Q425-061

Dec

2025

Should I Put My Bonus Into My 401(k)? Here’s What You Should Consider

By Paulina Likos | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

If you received a bonus and you’re wondering what to do with the bonus money, you’re not alone. Investing your bonus money in a tax-advantaged retirement account like a 401(k) has some tangible advantages. Not only will the extra cash help your nest egg to grow, you could also see some potential tax benefits.

Of course, we live in a world of competing financial priorities. You could also pay down debt, spend the money on something you need, save for a near-term goal — or splurge! The array of choices can be exciting — but if a secure future is your top goal, it’s important to consider a 401(k) bonus deferral.

Here are a few strategies to think about before you make a move.

Key Points

• Investing a bonus in a 401(k) can significantly enhance retirement savings and offer potential tax benefits.

• Bonuses are subject to income tax withholding, which may reduce the expected amount.

• Contribution limits for a 401(k) are $23,500 in 2025 and $24,500 in 2026 for those under age 50. Those aged 50 and over can make an additional catch-up contribution.

• If 401(k) contributions are maxed out, considering an IRA or a taxable brokerage account is beneficial.

• Allocating a bonus to a 401(k) or IRA can reduce taxable income for the year, potentially lowering the tax bill.

Receiving a Bonus Check

First, a practical reminder. When you get a bonus check, it may not be in the amount that you expected. This is because bonuses are subject to income tax withholding. Knowing how your bonus is taxed can help you understand how much you’ll end up with so you can determine what to do with the money that’s left, such as making a 401(k) bonus contribution. The IRS considers bonuses as supplemental wages rather than regular wages.

Ultimately, your employer decides how to treat tax withholding from your bonus. Employers may withhold 22% of your bonus to go toward federal income taxes. But some employers may add your whole bonus to your regular paycheck, and then tax the larger amount at normal income tax rates. If your bonus puts you in a higher tax bracket for that pay period, you may pay more than you expected in taxes.

Also, your bonus may come lumped in with your paycheck (not as a separate payout), which can be confusing.

Whatever the final amount is, or how it arrives, be sure to set aside the full amount while you weigh your options — otherwise you might be tempted to spend it.

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement by opening an IRA account. The money you save each year in a traditional IRA is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

What to Do With Bonus Money

There’s nothing wrong with spending some of your hard-earned bonus from your compensation. One rule of thumb is to set a percentage of every windfall (e.g. 10% or 20%) — whether a bonus or a birthday check — to spend, and save the rest.

To get the most out of a bonus, though, many people opt for a 401k bonus deferral and put some or all of it into their 401(k) account. The amount of your bonus you decide to put in depends on how much you’ve already contributed, and whether it makes sense from a tax perspective to make a 401(k) bonus contribution.

Contributing to a 401(k)

For 2025, the contribution limit for 401(k) plans is $23,500. Those 50 and older can add another $7,500, for a total of $31,000. Those aged 60 to 63 can contribute an additional $11,250, for a total of $34,750.

For 2026, the contribution limit for 401(k) plans is $24,500. Those 50 and older can add another $8,000, for a total of $32,500. Those aged 60 to 63 can contribute an additional $11,250, for a total of $35,750.

If you haven’t reached the limit yet, allocating some of your bonus into your retirement plan can be a great way to boost your retirement savings.

In the case where you’ve already maxed out your 401(k) contributions, your bonus can also allow you to invest in an IRA or a non-retirement (i.e. taxable) brokerage account.

Contributing to an IRA

If you’ve maxed out your 401k contributions for the year, you may still be able to open a traditional tax-deferred IRA or a Roth IRA. It depends on your income.

In 2025, the contribution limit for traditional IRAs and Roth IRAs is $7,000; with an additional $1,000 if you’re 50 or older. In 2026, the contribution limit for traditional IRAs and Roth IRAs is $7,500; with an additional $1,100 if you’re 50 or older.

However, if your income is $165,000 or more (for single filers) or $246,000 or more (for married filing jointly) in 2025, you aren’t eligible to contribute to a Roth. For 2026, you can’t contribute to a Roth if your income is $168,000 or more (for single filers) or $252,000 or more (for married filing jointly).

If you’re covered by a workplace retirement plan and your income is too high for a Roth, you likely wouldn’t be eligible to open a traditional, tax-deductible IRA either. You could however open a nondeductible IRA. To understand the difference, you may want to consult with a professional.

Contributing to a Taxable Account

Of course, when you’re weighing what to do with bonus money, you don’t want to leave out this important option: Opening a taxable account.

While employer-sponsored retirement accounts typically have some restrictions on what you can invest in, taxable brokerage accounts allow you to invest in a wider range of investments.

So if your 401(k) is maxed out, and an IRA isn’t an option for you, you can use your bonus to invest in stocks, bonds, exchange-traded funds (ETFs), mutual funds, and more in a taxable account.

Deferred Compensation

You also may be able to save some of your bonus from taxes by deferring compensation. This is when an employee’s compensation is withheld for distribution at a later date in order to provide future tax benefits.

In this scenario, you could set aside some of your compensation or bonus to be paid in the future. When you defer income, you still need to pay taxes later, at the time you receive your deferred income.

Your Bonus and 401(k) Tax Breaks

Wondering what to do with a bonus? It’s a smart question to ask. In order to maximize the value of your bonus, you want to make sure you reduce your taxes where you can.

One method that’s frequently used to reduce income taxes on a bonus is adding some of it into a tax-deferred retirement account like a 401(k) or traditional IRA. The amount of money you put into these accounts typically reduces your taxable income in the year that you deposit it.

Here’s how it works. The amount you contribute to a 401(k) or traditional IRA is tax deductible, meaning you can deduct the amount you save from your taxable income, often lowering your tax bill. (The same is not true for a Roth IRA or a Roth 401(k), where you make contributions on an after-tax basis.)

The annual contribution limits for each of these retirement accounts noted above may vary from year to year. Depending on the size of your bonus and how much you’ve already contributed to your retirement account for a particular year, you may be able to either put some or all of your bonus in a tax-deferred retirement account.

It’s important to keep track of how much you have already contributed to your retirement accounts because you don’t want to put in too much of your bonus and exceed the contribution limit. In the case where you have reached the contribution limit, you can put some of your bonus into other tax deferred accounts including a traditional IRA or a Roth IRA.

How Investing Your Bonus Can Help Over Time

Investing your bonus may help increase its value over the long-run. As your money potentially grows in value over time, it can be used in many ways: You can stow part of it away for retirement, as an emergency fund, a down payment for a home, to pay outstanding debts, or another financial goal.

While it can be helpful to have some of your bonus in cash, your money is typically better in a savings or investment account where it has the potential to work for you. If you start investing your bonus each year in either a tax-deferred retirement account or non-retirement account, this could help you save for the future.

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The yearly question of what to do with a bonus is a common one. Just having that windfall allows for many financial opportunities, such as saving for immediate needs — or purchasing things you need now. But it may be wisest to use your bonus to boost your retirement nest egg — for the simple reason that you may stand to gain more financially down the road, while also potentially enjoying tax benefits in the present.

The fact is, most people don’t max out their 401(k) contributions each year, so if you’re in that boat it might make sense to take some or all of your bonus and max it out. If you have maxed out your 401(k), you still have options to save for the future via traditional or Roth IRAs, deferred compensation, or investing in a taxable account.

Keeping in mind the tax implications of where you invest can also help you allocate this extra money where it fits best with your plan.

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FAQ

Is it good to put your bonus into a 401(k)?

The short answer is yes. It might be wise to put some or all of your bonus in your 401(k), depending on how much you’ve contributed to your workplace account already. You want to make sure you don’t exceed the 401(k) contribution limit.

How can I avoid paying tax on my bonus?

Your bonus will be taxed, but you can lower the amount of your taxable income by depositing some or all of it in a tax-deferred retirement account such as a 401(k) or IRA. However, this does not mean you will avoid paying taxes completely. Once you withdraw the money from these accounts in retirement, it will be subject to ordinary income tax.

Can I put all of my bonus into a 401(k)?

Possibly. You can put all of your bonus in your 401(k) if you haven’t reached the contribution limit for that particular year, and if you won’t surpass it by adding all of your bonus. For 2025, the contribution limit for a 401(k) is $23,500 if you’re under age 50; those 50 and up can contribute an additional $7,500, for a total of $31,000. Those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, for a total of $34,750. In 2026, the contribution limit for a 401(k) is $24,500 if you’re under age 50; those 50 and up can contribute an additional $8,000, for a total of $32,500. Those aged 60 to 63 may contribute an additional $11,250 instead of $8,000, for a total of $35,750.

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1. How Each Account is Funded

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4. Early Withdrawal Rules

5. Required Minimum Distribution (RMD) Rules

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Your Age

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What’s the Best Split Between Roth and Traditional 401(k)?

The Takeaway

FAQ

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Can I max out both 401(k) and Roth 401(k)?

What Is A Stock Buyback?

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How Do Companies Buy Back Stock?

Open Market

Tender Offers

Why Do Companies Buy Back Stock?

1. Potentially Increases Stock Value

2. It Could Put Money Into Shareholders’ Hands

3. Takes Advantage of Tax Benefits

4. Offsets Dilution From Stock Options

5. Improves Financial Ratios

What Happens to Repurchased Stock?

The Pros and Cons of a Stock Buyback for Investors

Pros of a Stock Buyback

Tender Offer Premium

Potential For an Increased Total Return

Tax Benefits

Cons of a Stock Buyback

Other Potential Uses for Cash

Poor Timing

Buybacks Could Benefit Executives, Not Shareholders

The Takeaway

FAQ

Is a stock buyback positive or negative?

When should a company do a stock buyback?

Do I lose my shares in a buyback?

Most Tax-Friendly States for Retirement

Factors to Consider When Choosing the Best State to Retire In

Does the State Tax Social Security?

Does the State Tax Pensions?

Other Taxes That Affect Retirees

States to Avoid When Retiring

The Best States to Retire in 2026

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States with the Lowest Tax Burden

States With the Most Millionaires

Does It Make Financial Sense to Relocate in Retirement?

Pros and Cons of Relocating for Tax Benefits

The Takeaway

FAQ

What are the 3 states that don’t tax retirement income?

Which state is the best state to live in for tax purposes?

Which states do not tax your 401k when you retire?

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