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There are a grand total of 13 states that don’t tax retirement income, and nine of those states don’t tax income at all. This can be important for seniors to know, as holding onto as much retirement income as possible can be important — whether it’s coming from pensions, Social Security, a 401(k), or elsewhere.

Equally important to know: As of December 2025, there are 15 states that don’t tax pensions, and 41 states — plus the District of Columbia — that don’t tax Social Security benefits. Paying less in taxes can lower the strain on a retiree’s budget and help their money last longer. That becomes especially important when and if inflation shrinks purchasing power — as it has in recent years.

How Much Can State Taxes Take Out of Retirement Income?

Each state taxes income, including retirement income, differently. So, there are different states that don’t tax pensions, and then there are states that don’t tax Social Security, etc.

Accordingly, how much of a bite state taxes take out of retirement income can depend on several factors, including the applicable tax rate where you live, and your specific tax brackets.

Taxes can be an important consideration when choosing where to retire, and when to retire.

Getting your financial house in order is also important. A money tracker app can give you a bird’s eye view of your finances and help you keep tabs on where your money is coming and going.

Understanding State Income Tax

As of December 2025, 41 states levy taxes on wage and salary income, while nine states do not assess individual income tax. Washington taxes capital gains for certain high-income individuals.

In some states, the same tax rate applies to all taxable income. Other states use a graduated tax system with individual tax brackets, similar to the way the federal tax system works.

California has the highest marginal tax rate, at 13.30%. Other states with higher tax rates include Hawaii (11.0%), New York (10.90%), New Jersey (10.75%), and Oregon (9.90%). Aside from the states that have no income tax, the lowest marginal tax rate belongs to North Dakota and Arizona, which both have an income tax rate of 2.50%.

Further, if you were to look at the average retirement savings by state, it may help provide some more insight into where many retirees live — and why.

15 States That Don’t Tax Pensions

Altogether, there are 15 states that don’t tax federal or private pension plans. Some of these are states that have no income tax at all; others have provisions in state law that make them states with no pension tax. Here are which states don’t tax pensions:

State	Pension Tax Policy
Alabama	Pension income excluded from state income tax
Alaska	No state income tax
Florida	No state income tax
Hawaii	Qualifying pension income excluded from state tax
Illinois	Pension income excluded from state tax
Iowa	Qualified pension income excluded from state tax
Mississippi	Pension income excluded from state tax
Nevada	No state income tax
New Hampshire	Pension income excluded from state tax
Pennsylvania	Pension income excluded from state tax
South Dakota	No state income tax
Tennessee	No state income tax
Texas	No state income tax
Washington	Only taxes capital gains for high-income earners
Wyoming	No state income tax

Keep in mind that state or local government employee pension benefits may be treated differently. New York, for example, specifically excludes pension benefits paid by state or local government agencies from state income tax. If you move to another state, however, that state could tax your New York pension benefits.

41 States That Don’t Tax Social Security

Understandably, many people have questions about Social Security, including whether the program will remain solvent in the future. Another big one: How will taxes affect your benefit amount? That’s why it’s important to know which states don’t tax Social Security.

The good news is that 41 states and the District of Columbia do not tax Social Security benefits. In 2026, West Virginia will begin phasing out its tax on Social Security benefits. For 2026 tax returns (filed in 2027), benefits will be completely exempt.

So if you’ve chosen to retire, or at least are thinking about choosing a retirement date (which can affect your total Social Security payouts), you don’t need to worry about it. Similar to the states that don’t tax pensions, these states either have no income tax at all, offer exemptions, or have elected to exclude Social Security benefits from taxable income calculations.

State	Social Security Tax Policy	State	Social Security Tax Policy
Alabama	Not included in income tax calculations	Missouri	Not included in income tax calculations
Alaska	No state income tax	Nebraska	Not included in income tax calculations
Arizona	Not included in income tax calculations	Nevada	No state income tax
Arkansas	Not included in income tax calculations	New Hampshire	Not included in income tax calculations
California	Not included in income tax calculations	New Jersey	Not included in income tax calculations
Delaware	Not included in income tax calculations	New York	Not included in income tax calculations
Florida	No state income tax	North Carolina	Not included in income tax calculations
Georgia	Not included in income tax calculations	North Dakota	Not included in income tax calculations
Hawaii	Not included in income tax calculations	Ohio	Not included in income tax calculations
Idaho	Not included in income tax calculations	Oklahoma	Not included in income tax calculations
Illinois	Not included in income tax calculations	Oregon	Not included in income tax calculations
Indiana	Not included in income tax calculations	Pennsylvania	Not included in income tax calculations
Iowa	Not included in income tax calculations	South Carolina	Not included in income tax calculations
Kentucky	Not included in income tax calculations	South Dakota	No state income tax
Louisiana	Not included in income tax calculations	Tennessee	No state income tax
Maine	Not included in income tax calculations	Texas	No state income tax
Maryland	Not included in income tax calculations	Virginia	Not included in income tax calculations
Massachusetts	Not included in income tax calculations	Washington	Not included in income tax calculations
Michigan	Not included in income tax calculations	Washington, D.C.	Not included in income tax calculations
Mississippi	Not included in income tax calculations	Wisconsin	Not included in income tax calculations
		Wyoming	No state income tax

Montana and New Mexico do tax Social Security benefits, but with modifications and exceptions.

9 States That Don’t Tax Capital Gains

Federal capital gains tax applies when an investment or asset is sold for more than its original purchase price. The short-term capital gains tax rate applies to investments held for less than one year. Investments held for longer than one year are subject to the long-term capital gains tax.

States can also tax capital gains, though not all of them do. The states that do not tax capital gains are the same states that do not have income tax or have special tax rules on which income is taxable. As of 2026, they include:

•   Alaska

•   Florida

•   Missouri

•   Nevada

•   New Hampshire

•   South Dakota

•   Tennessee

•   Texas

•   Wyoming

As far as how much capital gains are taxed at the state level, the tax rate you’ll pay will depend on where you live. Some states offer more favorable tax treatment than others for capital gains.

13 States That Don’t Tax 401(k), TSP, or IRA Income

Yet another potential area where states can generate tax revenue is by taxing retirement accounts such as 401(k) plans, individual retirement accounts (IRAs), and Thrift Savings Plans (TSPs). In all, there are 13 states that don’t levy taxes on retirement income derived from these sources:

•   Alaska

•   Florida

•   Illinois

•   Iowa

•   Mississippi

•   Nevada

•   New Hampshire

•   Pennsylvania

•   South Dakota

•   Tennessee

•   Texas

•   Washington

•   Wyoming

34 States That Don’t Tax Retirement Income From the Military

There are certain states that tax military retirement income, but most do not. In all, 34 states don’t tax military retirement income, including those that don’t have income taxes, and others that have specifically carved out exceptions for military retirement income.

•   Alabama

•   Alaska

•   Arizona

•   Arkansas

•   Connecticut

•   Florida

•   Hawaii

•   Illinois

•   Indiana

•   Iowa

•   Kansas

•   Louisiana

•   Maine

•   Massachusetts

•   Michigan

•   Minnesota

•   Mississippi

•   Missouri

•   Nebraska

•   Nevada

•   New Hampshire

•   New Jersey

•   New York

•   North Carolina

•   North Dakota

•   Ohio

•   Oklahoma

•   Pennsylvania

•   South Dakota

•   Tennessee

•   Texas

•   Washington

•   Wisconsin

•   Wyoming

9 States With No Income Tax

As covered, there are a lot of different tax levels and tax types — some include different types of retirement income, some just involve plain old income tax itself. As such, it’s not always easy to determine which states don’t tax retirement income whatsoever. These states, however, do not levy income tax.

•   Alaska

•   Florida

•   Nevada

•   New Hampshire

•   South Dakota

•   Tennessee

•   Texas

•   Washington

•   Wyoming

5 States With Low Retirement Income Taxes

Taking everything into account — taxes on income, pensions, Social Security, military retirement income, and more — there are several states that offer retirees relatively low retirement income taxes. Aside from the nine that don’t tax income at all, these states may be a good option for seniors, as they offer low retirement income taxes in one form or another:

•   Alabama

•   Mississippi

•   Georgia

•   Pennsylvania

•   Washington

Which States Have the Lowest Overall Tax Burden on Retirees?

Again, there is a lot to consider when trying to determine an overall tax burden, especially on retirees. But if you were to whittle down a list of a handful of states in which the tax burden is the absolute least on retirees? It would come down to the states with the overall smallest income tax burden, and a few other factors.

Delaware

Delaware hasn’t been discussed much, and though it does have state income taxes, a few other factors make it particularly appealing for retirees. Specifically, its state income tax rate tends to be relatively low (2.2% – 6.6%), and it has low property taxes, no sales taxes, and no applicable estate taxes.

Nevada

Nevada is a state with no state income taxes — a big win for retirees — and that also has relatively low property taxes, and no estate taxes. It also doesn’t tax income from most retirement accounts, or military retirement income.

Wyoming

Wyoming is similar to Nevada in that it has no state income taxes, low property taxes, and no estate taxes. There are applicable sales taxes, but it’s a drop in the bucket compared to the overall tax burdens seen in other states.

Can You Have Dual State Residency?

Generally, most people are residents of just one state. It is possible, however, to have dual residency in two different states. This can happen if you live in each state for part of the year to attend school or to work.

The state of Virginia, for example, distinguishes between residents who maintain a home in the state for 183 days or more during the year and domiciliary residents who claim Virginia as their legal state of residence. Under state law, it’s possible to be a resident of Virginia and a domiciliary resident of another state.

For instance, a college student from California who lives in Virginia during the school year would be a dual resident. However, you can have only one domicile — in this example, it would be California.

If you live and earn taxable income in two different states during the year, you may have to file tax returns in both those states unless a reciprocity agreement exists. Reciprocity agreements ensure taxpayers only pay income tax to their home state, even if they work in another one.

What to Consider Before Moving to a Tax-Friendly State

Moving to a state that doesn’t tax pensions and Social Security could yield income tax savings, but it’s important to consider the bigger financial picture. Paying no or fewer income taxes on retirement benefits may not be much of a bargain if you’re stuck paying higher property taxes, or your heirs are left with steep inheritance taxes, for instance.

Also consider the overall cost of living. If everyday essentials such as housing, food, and gas are higher in a state that has no income tax, then your retirement benefits may have less purchasing power overall. If costs end up being higher than you anticipated, you might end up working after retirement to fill any retirement income shortfalls.

The Takeaway

There are a number of states that tend to be more tax-friendly for retirees, and those generally include the states that don’t levy any income taxes. That list comprises states such as Alaska, Nevada, Texas, Florida, and Tennessee. But there are other potential taxes to take into consideration, and states all have different tax rules in regards to pensions, retirement accounts, capital gains, and more.

As such, if you’re hoping to save on taxes during retirement, you’ll need to do a little digging into the specifics to see what might affect you, given your unique financial picture. It’s wise to take into account other tax types as well (property taxes, etc.), and overall cost of living. Doing a thorough cost-benefit analysis before deciding to move could be beneficial.

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.

See exactly how your money comes and goes at a glance.

FAQ

What is the most tax-friendly state to retire in?

The most tax-friendly states for retirees are states that don’t tax pensions and Social Security, and have a low tax-profile overall for sales and property tax. Some of the best states for retirees who want to avoid high taxes include Alabama, Florida, Georgia, Mississippi, Nevada, South Dakota, and Wyoming.

Which states have no 401(k) tax?

States that do not tax 401(k) distributions include: Alaska, Florida, Illinois, Iowa, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Which states do not tax pensions?

States that do not tax pensions include the nine states that have no income tax — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Additionally, six states — Alabama, Hawaii, Illinois, Iowa, Mississippi, and Pennsylvania — exclude pension income from state taxation.

How can I avoid paying taxes on retirement income?

The simplest way to avoid paying taxes on retirement income is to move to a state that has the smallest applicable tax burden on retirement income sources. That would include the short list of nine states that don’t have any sorts of state income tax. You may also want to consult a professional.

Which states are tax-free for Social Security?

There are a grand total of 41 states — plus the District of Columbia — that don’t tax Social Security benefits. That list includes the nine states that don’t tax income at all.

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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.

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.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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If you’re asked to void a check, which often happens when you’re setting up direct deposit, you might not be sure how to do it. Checks are being used less often these days, and as a result, people may be unfamiliar with the way they work.

Fortunately, the process of voiding a check for direct deposit or for any reason is pretty simple.

What Does It Mean to Void a Check?

First of all, what does it mean to void a check? When you write the word “VOID” on a blank check, it becomes a voided check meaning it cannot be used to draw money out of your account. This type of check is not used for deposit or cashing purposes.

Instead, the check, once you’ve voided it, can be used to set up direct deposit or bill pay. Establishing direct deposit or online bill pay eliminates the hassle of going to the bank to make payments or deposit your paycheck. It also automates your transactions to speed delivery and help you keep tabs on the money going in and out of your account.

Recommended: What Is an Outstanding Check?

How to Void a Check Step by Step

If you’re wondering how do you void a check, all you need is a blank check and a pen. Here’s how to complete the process:

Step 1: Use a Blue or Black Pen

This is a situation in which the writing instrument you use matters. Use a blue or black pen, not a pencil or a pen with a different color ink.

Step 2: Write ‘VOID’ in Large Letters Across the Check

Next, write “VOID” in large letters across the face of the check. However, be sure not to cover the account and/or routing numbers at the bottom. You could also write “VOID” in smaller letters on the payee line, amount line, in the amount box, and on the signature line, if you prefer.

Step 3: Keep a Record for Yourself

Write down the check number, recipient, and date in your checkbook and note that the check was voided so you don’t get confused by a skipped check when you balance your checkbook.

Why Would You Need to Void a Check?

There are practical uses for voiding a check including setting up direct payments or deposits, and automatic bill payments. Providing a voided check is a convenient way to share your banking information for such purposes. After all, copying your banking information (routing and account number) by hand leaves you vulnerable to mistakes.

Here are the top reasons to void a check:

•   Set up direct deposit with your employer for wages, salary, or expense reimbursement. Employers often let workers set up direct deposit instead of receiving a physical paycheck, and a voided check speeds the process.

•   Set up direct deposit for government benefits. Unemployment benefits and Social Security payments may be delivered by direct deposit instead of a mailed check. This way, both parties can enjoy the increased security of a digital transaction. Once the direct deposit turns up, you can then transfer funds to a different account as needed.

•   Establish automatic bill pay for loans, utility bills, or other payments. You may have the option to set up automatic payments for bills such as an auto loan or mortgage. Setting up autopay helps ensure you don’t miss a payment.

•   Void checks with mistakes. If you are writing a check from your checking account and make a mistake, you can write “VOID” across it, so no one uses or deposits it.

What’s the Difference Between a Voided Check and a Canceled Check

You may wonder what the difference between a voided and a canceled check is. When you make a void check, you are canceling a physical check you have in your possession. If you’ve lost a check (especially a blank one) or have sent out a check in error, that’s a different situation. You can contact your bank about stopping payment on the check.

When banks and credit unions talk about canceled checks, however, they are likely referring to ones that have already been used to transfer funds. The work of these checks is done, so to speak, so they are considered canceled.

The differences between a voided check and a canceled check are:

•   You can void a check yourself. To cancel a check, however, a bank or credit union has already been involved.

•   Voiding is quick and free. If you seek to cancel a check by stopping payment, it will involve time to speak to your bank, and there may be a fee charged to stop payment.

Recommended: How to Deposit a Check Online

No Checks? No Problem. Here’s What to Do

If you don’t have any checks, the first step to getting a checkbook is to open a new bank account. Checks may be free or may be offered for a fee. Many banks will give you preprinted “starter checks” to use until your personalized ones arrive.

If you already have a checking account but no checks, you can contact your bank or credit union about ordering checks. They can usually be ordered online, via a mobile app, over the phone, or in person.

What to Use Instead of a Voided Check for Direct Deposit

Aside from a voided check, you have other options to establish autopay or direct deposit. Here are some alternatives:

•   Direct deposit form. Some employers may let you use a direct deposit form without a voided check. In this case, ensure you complete your bank information correctly.

•   Preview a check. Some financial institutions let you “preview” your checks on your bank or credit union’s website before you order them online. If your financial institution allows this, you might be able to print out the preview and write “VOID” across it.

•   Enter bank information online. Depending on how your employer sets up direct deposit, you might have the option to connect directly to your bank account through your company’s payroll website. Just enter your bank information instead of supplying a voided paper check to manage your banking online.

•   Request a counter check at a bank branch. You may have the option to request what is known as a counter check at your local bank branch. You can use this specially printed check containing your bank information for your voided check. Some banks charge a fee for this service.

Recommended: Sending Money With Zelle

The Takeaway

Knowing how to void a check is a good skill to learn. When you write “VOID” on a check, it becomes a voided check you can use to set up autopay or direct deposit. Voided checks are not available for deposit or cashing.

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

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

FAQ

Can I void a blank check?

Yes, you can void a blank check by taking a blue or black pen and writing “VOID” across the face of the check. You could also write “VOID” in the payee line, amount line, amount box, and the signature line.

Can I void a check after it’s been sent?

You can’t void a check you have already sent. You’ll have to cancel the check. To do this, first make sure the check hasn’t cleared yet. Then, make sure you have your account number, check number, dollar amount, and date you wrote on the check. Contact your bank or credit union to stop payment. This action may require a fee.

Can I tell my bank to void a check?

You can void a check, but your bank can’t. A financial institution can stop payment on a check (possibly for a fee), and it typically cancels checks once they’re been paid.

How much does it cost to void a check?

Voiding a check is typically something that an account holder does, without a bank’s assistance, for free. A bank may stop payment on a check, however, at the account holder’s request, and this typically involves a fee of $20 to $35.

How do I void a check online?

Many major banks offer the option on their website or in app to generate a voided check image or PDF which can then be printed out. Another option would be to void a paper check, then scan it, and use that as needed online.

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Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. 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.

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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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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.

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.

Recommended: Important Retirement Contribution Limits

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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Investing for Retirement With SoFi

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.

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

Help grow your nest egg with a SoFi IRA.

FAQ

Is 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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Photo credit: iStock/Tempura

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