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The term growth savings account or grow savings account generally refers to a savings account that earns more than the average interest rate for a savings account. This allows your money to grow faster, just for sitting in the bank.

But are these accounts always a good bet? Important points to consider are:

• What is a growth savings account?

• How do growth savings accounts work?

• The pros and cons of a growth savings account

• How to open a growth savings account

What Is a Growth Savings Account?

Growth savings accounts are similar to regular savings accounts, except that they tend to pay a higher annual percentage yield (APY), which represents how much an account holder will earn in interest over the course of a year.

More commonly referred to as a high-yield savings account, these accounts can pay up to 15 times more than the average APY for a savings account, while helping keep those funds safe and accessible.

You may get a better interest rate on a growth savings account at an online bank or credit union versus a traditional brick-and-mortar bank. However, even at their best, the APYs on these savings accounts generally lag behind what you could earn by investing in the market over time. That makes growth savings accounts best-suited for your emergency fund and money that you’re saving for a short-term goal, such as a vacation or a large purchase.

How Do Growth Savings Accounts Work?

Growth savings accounts work in the same way as regular savings accounts. You open the account at a bank or credit union, deposit money into the account, and begin to earn interest on your balance. You can continue adding money to the account, either by making a deposit at a branch or ATM, transferring money from a linked account, or via mobile check deposit or direct deposit.

Savings accounts are typically insured up to $250,000 per depositor, per account ownership category, per insured bank by the Federal Deposit Insurance Corporation (FDIC) at banks and by the National Credit Union Administration (NCUA) at credit unions. So you can’t lose your money (up to certain limits) even if the bank were to go out of business.

Savings accounts allow easy access to your money when you need it, though some institutions may limit the number of withdrawals or transfers you can make to six or nine per month.

Recommended: How High-Yield Savings Accounts Work

Pros of a Growth Savings Account

Here’s a look at some of the advantages that come with opening a growth or high-yield savings account.

Higher Interest Rates

Because these savings accounts can offer higher interest rates, the money held in the account tends to grow faster than money held in traditional savings accounts. When determining what is a good interest rate, it’s a good idea to also look into minimum balance requirements. You may see that you need to keep your balance above a certain threshold to earn the highest available rate.

Accessible Form of Growth

Putting money in a savings account can be a great way to earn interest while keeping that money liquid, meaning you can access it as soon as you need it. You don’t need to sell off investments or wait until a particular maturity date to withdraw the money.

Recommended: CDs vs Savings Accounts Compared

Good Way to Build an Emergency Fund

Because these funds are fairly accessible, a growth savings account can be a great place to build an emergency fund. That way, the emergency fund can continue to grow until it might be needed.

Cons of a Growth Savings Account

There are also some downsides to growth savings accounts worth keeping in mind before opening one.

Limited Growth Opportunity

Yes, growth savings accounts typically earn more interest than traditional savings accounts. However, when considering your long-term savings options, there may be more strategic investments that can enhance growth over time. If, for instance, you’re saving for retirement, which is a few decades away, you might take a look at the stock market for growth.

Withdrawal Limits

Growth savings accounts generally provide easier access to funds than keeping money in investments. That said, you may only be able to make a certain number of withdrawals or transfers per month (such as six or nine) or risk running into fees. While the Federal Reserve withdrew this rule in 2020, banks are allowed to continue imposing those limits, so it’s a good idea to check.

Earnings Are Taxable Income

The interest earned in a growth savings account can count as taxable income. By contrast, the money you put into a Roth Individual Retirement Account (IRA) grows tax-free.

Recommended: What Is a Roth IRA and How Does It Work?

Choosing a Growth Savings Account

When you’re looking for ways to earn more interest on your money, a growth or high-yield savings account might be a good option. It’s a good idea to shop around to find the best fit for your needs. Here are a few factors to keep in mind when looking for a new savings account:

• APYs

• Minimum balance requirements

• Fees

• Account features

• Mobile app

• Other product and service offerings

How to Open a Growth Savings Account

While each banking institution will have its own process, opening a growth savings account typically includes the following steps:

• Fill out the application. When filling out a savings account application, you’ll usually provide details such as your name, Social Security number, proof of address (say, from a utility bill), and government-issued photo ID.

• Choose the account type. There may be different savings account types, such as an individual account or a joint account (to share with a spouse or family member). Select the kind that’s right for your needs.

• Designate beneficiaries. It’s important to choose a beneficiary for your growth savings account, just as you might select a beneficiary for a 401(k) plan. This is the person who would receive the account’s funds if you were to become incapacitated or pass away.

• Deposit funds. Some banks require a minimum initial deposit, so you may need to make that deposit to open the account.

• Create login information. To set up your online account, you’ll need to create login information such as a username and password. Be sure to create a unique and complex password with at least one capital letter, number, and symbol.

While there may be another step or two in some situations, that’s how to open a bank account.

The Takeaway

Growth savings accounts generally offer higher interest rates than traditional savings accounts, which can help your money grow faster. In some cases, however, these accounts may come with monthly fees and/or require you to maintain a certain minimum balance to earn the higher rate, so it pays to shop around.

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.

FAQ

How do growth savings accounts work?

Growth savings accounts function similarly to traditional savings accounts. The only difference between these account types is that growth savings accounts tend to have higher interest rates.

What does “growth account” mean?

A growth account, also known as a high-yield account, typically offers a higher interest rate than a traditional savings account. This higher interest rate leads to more growth on deposited funds.

How much interest does a growth savings account earn?

These days, a growth or high-yield savings account can earn as much as 4.10% APY. Be sure to compare rates at different banks before opening your account.

About the author

Jacqueline DeMarco

Jacqueline DeMarco is a freelance writer who specializes in financial topics. Her first job out of college was in the financial industry, and it was there she gained a passion for helping others understand tricky financial topics. Read full bio.

Photo credit: iStock/Eoneren

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2026 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 5/28/26. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
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¹SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per depositor per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by the SoFi Insured Deposit Program. Deposits may be insured up to $3M through participation in the program. See full terms at SoFi.com/banking/fdic/sidpterms. See list of participating banks at SoFi.com/banking/fdic/participatingbanks.

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SOBNK-Q226-121

While business checks and personal checks may seem like the same thing, there are actually some important differences. Sure, all checks can be used to pay bills or cover other expenses using funds in a linked checking account. But the main difference between a personal check and a business check is the source of funds. Personal checks are drawn on personal accounts, while business checks are drawn on business checking accounts.

Learn more about how these checks work and how they differ.

What Is a Business Check?

A business check is a check that’s written from a business checking account. Banks and credit unions may offer business checking accounts to sole proprietors, limited liability companies (LLCs), and other kinds of businesses that need a safe, secure place to keep their money. Business checks are often one of the features included with these accounts.

Business bank accounts may also offer a debit card for making purchases or cash withdrawals. They typically allow for Automated Clearing House (ACH) transfers of funds to pay bills or vendors. But there are some instances where it could make sense — or even be necessary — to use business checks instead. For example, you may need to write or print paper checks to cover payroll for employees.

💡 Quick Tip: Don’t think too hard about your money. Automate your budgeting, saving, and spending with SoFi’s seamless and secure mobile banking app.

How Does a Business Check Work?

When someone opens a business bank account, the bank may give them a set of business checks and a checkbook. If you are wondering what a checkbook is, it is simply a small folder or book that contains your checks and a check register, which is where you’ll write down deposits and credits for your account. Check registers may help you balance your checkbook.

To use a business check, you’d simply make the check out to the payee, then fill in the required information. That includes the date and amount of the check, as well as a signature. Business checks typically have a memo line where you can record what the check is being used for.

The payee can then take that business check to their bank to deposit it or cash it. The amount written on the check is then deducted from the business checking account on which the check is drawn. When the check is deposited, it typically takes one to five business days to clear (or for the funds to become available).

Recommended: Small Business Checking

What Does a Business Check Look Like?

Business checks look much like personal checks in terms of the type of information they include. On the front of a business check, you should see the following:

•   Business name and address

•   Check number (in the upper-right-hand corner)

•   Payee name (where it says “Pay to the Order of”)

•   Date

•   Dollar amount, in numbers

•   Dollar amount, in words

•   Payer’s signature

•   Memo line

•   The bank’s routing number

•   The account number

•   The bank’s name and address

Business checks may also include room for the business logo or a watermark.

There may be an attached transaction stub on the left-hand side of the check. You can use this stub to record the details of the transaction, including the date the check was written, the amount, and to whom it was paid.

Business checks can be handwritten like personal checks, or they can be filled digitally and printed out.

What Is a Personal Check?

A personal check, on the other hand, is a check that’s drawn against a personal checking account. Most but not all checking accounts offer checks and check-writing. Some even offer free starter checks to new customers.

Personal checks are paid using personal funds. So you might write a personal check to repay a friend you borrowed money from, for example, or to pay your rent. Likewise, you could receive a personal check made out to you that you could deposit into your bank account or cash. In terms of where to cash personal checks without a bank account, the options include check cashing services, supermarkets, and convenience stores.

Personal checks are not the same as other types of checks, including certified checks and traveler’s checks. If you’re unfamiliar with how to use traveler’s checks, these are paper certificates that can help you pay for things overseas without having to exchange hard currencies.

How Do Personal Checks Work?

Personal checks work by allowing individuals to pay bills or make other payments to individuals, businesses, and other organizations. When you open a checking account, the bank may give you paper checks with your name and account number printed on them. You can then use these checks to make payments.

When someone receives a personal check and deposits it in their account, their bank requests the transfer of funds from the bank on which the check was drawn. These transfers are processed electronically. Processing times can vary, though it typically takes a couple of business days for a check to clear.

If someone writes a personal check and doesn’t have sufficient funds in their account to cover it, that check will bounce. When a check you write bounces, it may be returned unpaid, or your bank may cover the amount for you, but they can charge overdraft or non-sufficient funds (NSF) fees for that convenience.

Bounced checks typically don’t show up on consumer credit reports or affect credit scores, though banks may report them to ChexSystems. A consumer credit-reporting agency, ChexSystems collects information about closed checking and savings accounts.

Can I Use a Personal Check for a Business Account?

Personal accounts and business accounts are separate banking products. That being said, you could use personal checks to pay for business expenses. For example, you could write out a personal check to pay a business lease or make payments on a business loan. And you could use funds in a business account to pay for personal expenses.

If you feel you must use personal checks for a business account or business checks for personal expenses, proceed with caution. Many personal checking account agreements specifically prohibit using this kind of account for business purposes. Familiarize yourself with your account guidelines. This should only happen in very limited circumstances and not as a regular practice.

What’s more, mixing your accounts this way may complicate matters when it comes time to pay your taxes and figure out personal vs. business deductions. If you ever need to review your business or personal account (say, for legal reasons or an audit), it can be hard to remember which funds were used where.

Using Business Checks vs Personal Checks

Whether you need to write a business check vs. a personal check can depend on the circumstances. For instance, some of the most common uses for business checks include:

•   Covering employee payroll

•   Making federal and state tax payments

•   Making payments to vendors

•   Paying operating costs, such as rent or utilities

•   Repaying a business loan

•   Making any large purchases that are necessary for the business

Personal checks can be used to meet a different set of needs. Examples of when you might write a personal check include:

•   Paying utility bills, rent, or your mortgage

•   Buying groceries

•   Repaying personal debts

•   Making payments on loans

•   Covering school-related expenses if you have kids (such as lunch money or PTA fundraisers)

•   Paying college tuition

•   Covering doctor bills

Whether you need business checks or personal checks, it helps to know where to order checks safely. You can get checks online from check-printing companies or order them through your bank.

Recommended: How Do I Sign Over a Check to Someone?

Differences Between a Business and Personal Check

Whether you’re using business checks or personal checks, one thing is true: They can be a dependable, convenient way to move money. They provide an alternative to using a debit card, credit card, ACH transfer, or wire transfer. But if you’re still wondering how business checks are different from personal checks, here are a few other noteworthy distinctions.

Size of the Check

Personal checks are usually somewhere around 6″ x 2″ x 3″ in size. Business checks, on the other hand, might or might not be larger in size. For example, they may be 8″ x 2″ x 3″ instead. The larger size allows for easier printing and more room for writing out checks by hand.

Security of the Check

Check fraud can threaten a business’s bottom line. For that reason, many check printers include built-in security measures to minimize the chances of a business check being stolen or otherwise used fraudulently. Those measures can include holographic features, thermochromatic ink, and chemically sensitive paper. These features all help to verify a check’s authenticity.

How Much Each Check Costs

As mentioned, banks can sometimes offer starter checks for free when you open a new checking account. This benefit may not be included with business checking accounts, which means you might need to buy checks yourself. The amount you pay can depend on the type of check, any added features you choose to include, and the number of checks printed. You might pay $0.01 per check or $0.30 or more per personal check, depending on where you order from, the features you want, and how quickly you want them printed and delivered.

Business checks range in cost, but online retailers may charge $0.10-$1 each.

There can be other charges associated with checks. For example, you may also pay separate fees when purchasing cashier’s checks for a business or personal account. Cashier’s checks are drawn against the bank’s account, not yours, though a cashier’s check looks very much like a personal or business check.

Check Conversion Protection

Check conversion is a process in which paper checks are converted to electronic ACH debits. Both consumer and business checks can be converted in this way. Converted checks usually clear faster, but it’s possible that you may not want this for checks written from a business account. In that case, you could order business checks that include an optional “Auxiliary On-Us” field to exclude them from conversion.

Why to Consider Having Separate Checks

Using one bank account for business and personal expenses might seem simpler and less stressful since you’re moving money in and out of the same place. However, as noted above, which kind of check to use is not typically a matter of personal choice. Personal checking accounts usually have restrictions against use for business purposes.

What’s more, establishing a business account has other benefits:

•   Writing checks with your business name can add credibility to your venture since it looks more professional.

•   A business account helps you keep track of business finances and expense reporting for tax purposes.

•   Establishing a business checking account could make it easier to get approved for business loans or lines of credit if you have a good banking history.

•   Having separate business and personal checking accounts can provide added protection against creditor lawsuits. Depending on how your business is structured, money in a personal checking account may be safe from collection efforts if you’re sued by a creditor.

The Takeaway

Business checks and personal checks serve similar functions: They both transfer funds from one account to another. However, they do have some important differences, and you typically cannot use a personal check for business purposes.

For your personal bank accounts, see what SoFi offers.

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.

FAQ

Can you cash a business check?

You can cash a business check if your bank allows it. You’ll need to endorse the check properly and show proof of identification to cash it, the same as you would with any other type of check.

What should be on a business check?

A business check should include the business name and address, the payee’s name, the amount of the check, the date, and the payer’s signature. The check will likely be preprinted with the bank’s name and address, a routing number and account number, and a check number. A business check may also include a memo line to record the purpose of the check.

Do checks need to say LLC?

Checks do not need to say “LLC” unless your business is structured as an LLC. If your business operates as a sole proprietor, partnership, S corporation, or anything other than an LLC, then you wouldn’t need to include that designation.

Photo credit: iStock/fizkes

SOBNK-Q226-107

Employer-sponsored retirement plans like a 401(k) are a common way for workers to save for retirement. According to the Bureau of Labor Statistics, 53% of private industry employees participate in a retirement plan at work. So participants need to understand how 401(k) taxes work to take advantage of this popular retirement savings tool.

With a traditional 401(k) plan, employees can contribute a portion of their salary to an account with various investment options, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs).

There are two main types of workplace 401(k) plans: a traditional 401(k) plan and a Roth 401(k). The 401(k) tax rules depend on which plan an employee participates in.

Traditional 401(k) Tax Rules

When it comes to this employer-sponsored retirement savings plan, here are key things to know about 401(k) taxes and 401(k) withdrawal tax.

401(k) Contributions Are Made With Pre-tax Income

One of the biggest advantages of a 401(k) plan is its tax break on contributions. When you contribute to a 401(k), the money is deducted from your paycheck before taxes are taken out, which reduces your taxable income for the year. This means that you’ll generally pay less in income tax, which can save you a significant amount of money over time.

If you’re contributing to your company’s 401(k), each time you receive a paycheck, a self-determined portion of it is deposited into your 401(k) account before taxes are taken out, and the rest is taxed and paid to you.

There are annual limits on 401(k) contributions. Here’s a look at the 401(k) contribution limits for 2025 and 2026.

Super catch-up contributions, a provision of the SECURE 2.0 Act, are temporary enhanced catch-up contribution limits for individuals ages 60 to 63 who are enrolled in a participating retirement plan. Check with your plan administrator to see if your plan offers the super catch-up option.

Additionally, under a new law regarding catch-up contributions that went into effect on January 1, 2026, individuals aged 50 and older whose FICA wages exceeded $150,000 in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. Because of the way Roth accounts work, these individuals will pay taxes on their catch-up contributions upfront, but can make eligible withdrawals tax-free in retirement. (See more about Roth 401(k)s below.)

401(k) Contributions Lower Your Taxable Income

The more you contribute to your 401(k) account, the lower your taxable income is in that year (aside from the catch-up exception noted above for certain individuals). If you contribute 15% of your income to your 401(k), for instance, you’ll only owe taxes on 85% of your income.

Withdrawals From a 401(k) Account Are Taxable

When you take withdrawals from your 401(k) account in retirement, you’ll be taxed on your contributions and any earnings accrued over time.

The withdrawals count as taxable income, so during the years you withdraw funds from your 401(k) account, you will owe taxes in your retirement income tax bracket.

Early 401(k) Withdrawals Come With Taxes and Penalties

If you withdraw money from your 401(k) before age 59 ½, you’ll owe both income taxes and a 10% tax penalty on the distribution.

Although individual retirement accounts (IRAs) allow penalty-free early withdrawals for qualified first-time homebuyers and qualified higher education expenses, that is not true for 401(k) plans.

That said, if an employee leaves a company during or after the year they turn 55, they can start taking distributions from their 401(k) account without paying a 10% early withdrawal penalty. They will, however, still owe taxes on distributions from a traditional 401(k) plan.

Can you take out a loan or hardship withdrawal from your plan assets? Many plans do allow that up to a certain amount, but withdrawing money from a retirement account means you lose out on the compound growth from funds withdrawn. You will also have to pay interest (yes, to yourself) on the loan.

Roth 401(k) Tax Rules

Here are some tax rules for a Roth 401(k).

Your Roth 401(k) Contributions Are Made With After-Tax Income

When it comes to taxes, a Roth 401(k) works the opposite way of a traditional 401(k). Your contributions are post-tax, meaning you pay taxes on the money in the year you contribute. Your withdrawals in retirement are tax-free.

If you have a Roth 401(k) and your company offers a 401(k) match, matching contributions have typically gone into a pre-tax account, which would be a traditional 401(k) account. But thanks to SECURE 2.0, an employer can now provide an option that allows fully-vested employees to have their employer matching contributions made on a Roth (post-tax) basis. Because the matching contributions are made with after-tax dollars, employees pay taxes on them in the year they are made.

Recommended: How an Employer 401(k) Match Works

Roth 401(k) Contributions Do Not Lower Your Taxable Income

When you have Roth 401(k) contributions automatically deducted from your paycheck, your full paycheck amount will be taxed, and then money will be transferred to your Roth 401(k).

For instance, if you’re making $50,000 and contributing 10% to a Roth 401(k), $5,000 will be deposited into your Roth 401(k) annually, but you’ll still be taxed on the full $50,000.

Roth 401(k) Withdrawals Are Tax-Free

When you take money from your Roth 401(k) in retirement, the distributions are tax-free, including your contributions and any earnings that have accrued (as long as you’ve had the account for at least five years).

No matter what your tax bracket is in retirement, qualified withdrawals from your Roth 401(k) are not counted as taxable income.

It can also be helpful to know that, like a Roth IRA, a Roth 401(k) no longer requires participants to start taking required minimum distributions at age 73.

There Are Limits on Roth 401(k) Withdrawals

In order for a withdrawal of earnings from a Roth 401(k) to count as a qualified distribution — meaning, it won’t be taxed — an employee must be age 59 ½ or older and have held the account for at least five years.

If you make a withdrawal of earnings before this point — even if you’re age 61 but have only held the account since age 58 — the withdrawal would be considered an early, or unqualified, withdrawal. If this happens, you would owe taxes on any earnings you withdraw and be subject to a 10% penalty. (You can withdraw your contributions tax-free at any time without penalty or taxes.)

Early withdrawals are prorated according to the ratio of contributions to earnings in the account. For instance, if your Roth 401(k) had $100,000 in it, made up of $70,000 in contributions and $30,000 in earnings, your early withdrawals would be made up of 70% contributions and 30% earnings. Hence, you would owe taxes and potentially penalties on 30% of your early withdrawal.

If the plan allows it, you can take a loan from your Roth 401(k), just like a traditional 401(k), and the same rules and limits apply to how much you can borrow. Any Roth 401(k) loan amount will be combined with outstanding loans from that plan or any other plan your employer maintains to determine your loan limits.

You Can Roll Roth 401(k) Money Into a Roth IRA

Money in a Roth 401(k) account can be rolled into a Roth IRA. Like an employer-sponsored Roth 401(k), a Roth IRA is funded with after-tax dollars.

It’s important to note, however, that there’s also a five-year rule for Roth IRAs: Earnings cannot be withdrawn tax- and penalty-free from a Roth IRA until five years after the account’s first contribution. If you roll a Roth 401(k) into a new Roth IRA, the five-year clock starts over at that time.

Do You Have to Pay Taxes on a 401(k) Rollover?

If you do a direct rollover of your 401(k) into an IRA or another eligible retirement account, you generally won’t have to pay taxes on the rollover. However, if you receive the funds from your 401(k) and then roll them over yourself within 60 days, you may have to pay taxes on the amount rolled over, as the IRS will treat it as a distribution from the 401(k).

Recommended: How to Roll Over Your 401(k)

Do You Have to Pay 401(k) Taxes after 59 ½?

If you have a traditional 401(k), you will generally have to pay taxes on withdrawals after age 59 ½. This is because the money you contributed to the 401(k) was not taxed when you earned it, so it’s considered income when you withdraw it in retirement.

However, if you have a Roth 401(k), you can withdraw your contributions and earnings tax-free in retirement as long as you meet certain requirements, such as being at least 59 ½ and having had the account for at least five years.

Do You Pay 401(k) Taxes on Employer Contributions?

The taxation of employer contributions to a 401(k) depends on whether the account is a traditional or Roth 401(k).

In the case of traditional 401(k) contributions, the employer contributions are not included in your taxable income for the year they are made, but you will pay taxes on them when you withdraw the funds from the 401(k) in retirement.

In the case of Roth 401(k) employer contributions, it depends whether the contributions are made on a Roth or traditional 401(k) basis. If they are made on a Roth basis, you will pay taxes on them in the year they’re made, but not when you withdraw them in retirement. If the contributions are made in a pre-tax traditional 401(k) basis, you won’t pay taxes on them in the year they are made, but you will pay taxes on them when you make withdrawals in retirement.

How Can I Avoid 401(k) Taxes on My Withdrawal?

The only way to avoid taxes on 401(k) withdrawals is to take advantage of a Roth 401(k), as noted above. With a Roth 401(k), your contributions are made post-tax, but withdrawals are tax-free if you meet certain criteria to avoid the penalties.

However, even if you have to pay taxes on your 401(k) withdrawals, you can take the following steps to minimize your taxes.

Consider Your Tax Bracket

Contributing to a traditional 401(k) means you’re choosing to forgo taxes now and pay taxes later, when you’re hoping to be in a lower tax bracket in retirement.

Contributing to a Roth 401(k) takes the opposite approach: Pay taxes now, so you don’t have to pay taxes later. The best approach for you will depend on your income, your tax situation, and your future tax treatment expectations.

Strategize Your Account Mix

Having savings in different accounts — both pre-tax and post-tax — may offer more flexibility in retirement.

For instance, if you need to make a large purchase, such as a vacation home or a car, it may be helpful to be able to pull the income from a source that doesn’t trigger a taxable event. This might mean a retirement strategy that includes a traditional 401(k), a Roth IRA, and a taxable brokerage account.

Decide Where To Live

Nine U.S. states don’t charge individual income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. (Washington state does tax capital gains of certain high earners.)

This can affect your tax planning if you live in a tax-free state now or intend to live in a tax-free state in retirement.

The Takeaway

Saving for retirement is one of the best ways to prepare for a secure future. And understanding the tax rules for 401(k) withdrawals and contributions is essential for effective retirement planning. By educating yourself on the rules and regulations surrounding 401(k) taxes, you can optimize your retirement savings and minimize your tax burden.

Another strategy to help stay on top of your retirement savings is to consider rolling over a previous 401(k) to a rollover IRA. Then you can manage your money in one place.

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.

FAQ

Do you get taxed on your 401(k)?

Yes. You either pay taxes on your 401(k) contributions — in the case of a Roth 401(k) — or on your traditional 401(k) withdrawals in retirement.

When can you withdraw from a 401(k) tax-free?

You can withdraw from a Roth 401(k) tax-free if you have had the account for at least five years and are over age 59 ½. With a traditional 401(k), withdrawals are generally subject to income tax.

How can I avoid paying taxes on my 401(k)?

You never truly avoid paying taxes on a 401(k), as you either have to pay taxes on contributions or withdrawals, depending on the type of 401(k) account it is. By contributing to a Roth 401(k) instead of a traditional 401(k), you can withdraw your contributions and earnings tax-free in retirement, but you will pay taxes on your contributions in the year you make them.