As anyone who has ever watched their bank account balance decline after paying bills knows, owing money is no fun. But debt often serves an important function in people’s lives, putting things that can cost tens of thousands of dollars or more — like a college degree or a starter home — within reach.
Such cases aren’t quite the same as racking up a high credit card balance on restaurant meals and shopping trips, underscoring that when it comes to owing money, there can be good debt and bad debt.
What Is Debt Exactly?
It’s a simple four-letter word, yet debt is often not as straightforward as it may appear. Carrying a credit card balance? That’s debt. Have a student loan or car lease? Also debt.
When individuals owe money, they generally have to pay back more than the amount they borrowed. Most debt is subject to interest, the borrowing cost that is applied based on a percentage of money owed.
Interest accrues over time, so the longer consumers take to pay off debt, the more it may cost them.
Across people and households, debts add up. According to the Federal Reserve Bank of New York, by the end of 2022, total household debt climbed to $16.90 trillion.
Housing debt — specifically mortgages and mortgage refinancing — accounted for the majority of money owed, more than $12 trillion. Non-housing debt, such as credit card balances and school and car loans, accounted for the rest.
For individuals, average debt amounted to $101,915 in the fall of 2022, according to the credit reporting company Experian. While student loan debt was down slightly, shrinking by 1.2% from the year before — many other debts, including amounts owed on credit cards, personal loans, car loans, home equity lines of credit (HELOCs), and mortgages, all increased from the year before, according to Experian.
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When you have debt, not only do you have to repay the money borrowed, but you also usually incur ongoing costs — specifically interest — which increase the amount you have to pay back.
While incurring more debt probably isn’t the most attractive proposition, there are occasions when taking on debt can be necessary or even beneficial in the long term. This is where good debt vs. bad debt comes in.
Though the idea of good vs. bad debt might seem complicated (and is often subject to some misconceptions), as a rule of thumb, the difference between good debt and bad debt usually has to do with the long-term results of borrowing.
Good debt is seen as money owed on expenditures that can build an individual’s finances over time, such as taking out student loans in order to increase one’s earning potential, or a mortgage on a house that is expected to appreciate in value.
Bad debt is money owed for expenses that pose no long-term value to a person’s financial standing, or that may even decrease in value by the time the loan is paid off. This can include credit card debt and car loans.
While owing money may not feel great, debt can serve some helpful functions. For starters, your credit score is used by lenders to determine eligibility and risk level when it comes to borrowing money.
Your credit score is based on your history of taking on and paying off debt, and helps to inform a lender about how risky a loan may be to issue. Your credit score can play an important role in determining not only whether a credit card or loan application will be approved but also how much interest you will be charged.
With no credit history at all, it may be harder for a lender to assess a loan application. Meanwhile, a solid track record of paying off good debt on time can help inspire confidence.
While there are no guarantees, good debt can also mean short-term pain for long-term gain. That’s because if paid back responsibly, good debt can be an investment in one’s future financial well-being, with the results ultimately outweighing the cost of borrowing.
Conversely, with bad debt, the costs of borrowing add up and may surpass the value of a loan.
Like other lending products, mortgages are subject to annual interest on the principal amount owed.
In the United States, the average rate of a 30-year fixed-rate mortgage was averaging 6.28% nationally in April 2023, according to the Federal Reserve Bank of St. Louis. That’s up from 2022, when the average rate for a 30-year fixed-rate mortgage was 4.72%.
Meanwhile, data from the Federal Housing Finance Agency showed that home prices grew 8.4% from the end of 2021 to the fourth quarter of 2022.
This illustrates how the potential appreciation of a home might outweigh the cost of financing. But it’s best to not assume that taking on a mortgage to buy a house will increase wealth. Things like neighborhood decline, periods of financial uncertainty, and the individual condition of a home could reduce the value of a given property.
Personal loans or home equity loans used to improve the condition of a home may also increase its value, and in such instances may also be considered “good” debt.
Forty-three percent of Americans who attended college incurred some kind of education debt, with most outstanding loans in a recent year coming in between $20,000 and $25,000, according to the Federal Reserve.
Cumulative income gains may eclipse the cost of a student loan over time.
But higher education may be linked with greater earnings, and cumulative income gains might eclipse the cost of a student loan over time.
According to the U.S. Bureau of Labor Statistics, the median weekly earnings for a bachelor’s degree holder are $1,547, which is more than $650 greater than the median weekly pay of someone with a high school diploma.
But just as taking out a mortgage is not a sure-fire way to boost net worth, student debt is not always guaranteed to result in greater earnings. The type of degree earned and area of focus, unemployment rates, and other factors will also influence an individual’s earnings.
Credit cards can be useful financial tools if used responsibly. They may even provide cash back or other rewards. And because interest is generally not charged on purchases until the statement becomes due, using a credit card to pay for everyday purchases need not be costly if the balance on the card is paid before the billing cycle ends.
However, credit cards are often subject to high interest rates. According to the Federal Reserve Bank of St. Louis, the average annual interest rate for credit cards is 20.09% — but some charge rates even higher.
Credit card interest adds up, making that takeout dinner or pair of jeans far more costly than the amount shown on its price tag if a balance is carried over. For example, if you were to charge $500 in takeout food to a credit card with a 20% APR but only pay the $10 minimum each month, it would take nine years to pay off the full balance. The total amount paid — including interest — would be $1,084. That’s more than double the cost of those takeout meals!
The dollar value of your car may not be what you think it is. Cars famously start to lose value the second you drive them off the lot. A new vehicle loses 20% or more of its value in the first year of ownership, according to Kelley Blue Book. After five years, a car purchased for $40,000 will be worth $16,000, a decrease in value of 60%.
But a car may also be necessary for getting around. For some individuals, owning a car can also help them earn or boost income, reducing or negating depreciation.
The Takeaway
Both good debt and bad debt can be stressful — and both types of debt can be more costly than they need to be if you don’t keep tabs on what you owe and pay back loans efficiently. A digital tracker could be the remedy.
SoFi gives you the information you need to manage debt, providing real-time financial insights and tracking so you can stay on top of what you owe.
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A debit combines some of the features of an ATM card and a credit card to give you an easy way to access cash and pay for purchases. For many people, tapping, swiping, or entering their digits online has become a favorite way to conduct everyday financial transactions.
Debit cards resemble credit cards, but they don’t involve a line of credit or accruing interest charges; the money spent is deducted directly from your checking account. This (and other features) can be a benefit or a downside, depending on your particular situation.
Here, learn more about the ins and outs of debit cards and how to use them most efficiently, including:
• What is a debit card?
• How do debit cards work?
• Where can you use a debit card?
• What are the differences between a debit card vs. an ATM card?
• What are the differences between a debit card vs. a credit card?
Debit Cards Defined
A debit card is a payment card that allows you to spend money without carrying cash.
When you use a debit card, the funds are your own, so there’s nothing to pay back later.
Most debit cards look just like credit cards. They typically feature an account number on the front, along with the cardholder’s name and the expiration date.
There will likely also be a smart chip on the front, along with a logo in the lower right-hand corner that tells you which payment network the card is connected to (such as Visa, Mastercard, or Discover). On the back you’ll likely see a place to sign, as well as a three-digit security code (CCV).
But there are some major differences between debit cards and credit cards.
When someone uses a credit card the money is borrowed. Credit card holders receive a bill every month for what they owe, and the balance must be paid in full or they can be charged interest.
When you use a debit card to get cash or make a purchase, the money comes directly from an account you have with a bank or some other type of financial institution. The funds are your own, so there’s nothing to pay back later.
How a Debit Card Works
Now that you know what a debit card is, here’s how a debit card typically works:
• You tap, swipe, or insert the card at a terminal and enter your PIN (personal identification number) in many cases. The PIN adds a level of security to the transaction.
• The information is communication (the amount of your purchase) and your bank verifies that the funds are available in your checking account. The transaction is approved in that case, or it will be denied if you don’t have enough funds available.
• In a similar way, a debit card can allow you to deduct funds from an ATM.
Worth noting: Debit cards may have spending limits capping the amount you can use in a single day, even if you have more than that amount on deposit. Check with your financial institution to learn what may apply.
Features of a Debit Card
Debit cards have many features that make them an asset to managing your financial life:
• Safer than carrying cash
• More convenient that using checks, plus no fee for ordering checks
• Quick and easy way to make purchases or access cash
• Accepted for purchases by many vendors
• Does not charge interest since it draws directly from your checking account
• Typically don’t charge fees
• May offer cash back rewards
• May have daily spending limits
How Do You Get a Debit Card?
If you don’t already have one, you may wonder how people get debit cards. These are the steps to getting a debit card:
1. Open a checking account: Checking accounts (whether at a bank, credit union, or online financial institution) typically come with a debit card that can be used to get cash at ATMs or to make purchases.
A brick and mortar bank may be able to issue customers a new debit card right away. With an online institution, it might take a few days for the card to come by mail. Card holders also receive a personal identification number (PIN), which is a security code they’ll use with their account.
2. Activate the card: Typically, you can activate a new debit card at the financial institution’s website, at one of its ATMs, or by calling a designated phone number and answering or keying in some basic identifying information.
3. Start using your card. You should be ready to start tapping, swiping and entering your card’s digits online to make purchases.
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Where Can You Use a Debit Card?
A debit card can be used to make withdrawals at an ATM, to make in-person or online purchases, and to make automatic payments for recurring bills.
Each type of transaction works a bit differently. Here are tips for using your debit card.
At the ATM
One of the great conveniences a debit card has to offer is that it can be used to get cash (or make a deposit, transfer funds, or just view your account balance) just about anywhere there’s an ATM.
You just push your debit card into the slot, and enter your PIN to get access to your account. Once you finish and retrieve your receipt and debit card, it’s a good idea to double check that the machine has returned to its welcome screen before turning it over to the next user.
If you use an ATM that’s not in your bank’s network, you could end up paying a non-network fee to your bank and an ATM surcharge to the ATM’s owner. If you’re overseas, you might also be charged a foreign transaction fee.
If you’re a big-time ATM user, you might be able to avoid those fees by scouting out in-network ATM locations in your area or where you are going to be traveling ahead of time. Or you might open an account at a financial institution that doesn’t charge fees and/or reimburses certain fees.
Quick Money Tip: Fees can be a real drag when you’re trying to save money. SoFi’s high-yield checking account has no account fees, including overdraft coverage up to $50.
In-Person Purchases
The process for using a debit card to purchase goods or services can be a little different from one merchant to the next.
Typically a customer will be asked to swipe, insert, or tap their debit card themselves at a card reader on the counter, then may be prompted to authorize the purchase, either by entering their PIN or by signing as they would with a credit card.
Either way, the money to pay for the purchase comes out of the card holder’s account, though the transactions are processed somewhat differently.
The transaction method also may affect any points or other rewards a card holder is hoping to earn on a purchase. Some programs reward PIN purchases only, some reward signature purchases only, and some reward both.
A retailer also may allow customers making a PIN transaction to ask for cash back on top of the total amount of their purchase, so they don’t have to make a separate trip to an ATM. However, you may be charged a small fee for this convenience.
Online Purchases
Can you use a debit card online? Usually, yes, even if you do not see “debit card” listed as a payment method when you want to buy something online. But if there’s a credit network logo on the front of your debit card, you should be able to use your card for the transaction.
When a merchant’s website asks for a payment method, debit card users can choose “credit card,” then enter their debit card account number, expiration date, and three-digit security code (CCV) to have the purchase processed as a signature transaction. (A PIN transaction won’t be a payment option online.)
Automatic Payments
A debit card also can be used to make automatic payments on monthly bills, such as student loans, car loans, subscriptions and memberships, and utility bills.
To set up automatic debit payments, the card holder provides the company with a debit card account number, expiration date, and CCV, and authorizes future electronic withdrawals. The payment can be the same amount every month, or, if the amount is likely to vary a bit from month to month (as utility bills generally do), the card holder can specify a range.
With automatic debit payments, card holders give businesses permission to take payments from their account, which is different from arranging with the bank to make authorized recurring payments. In both cases, however, it can be important to track those payments and be sure the transactions are accurate.
Is There a Difference Between a Debit Card and an ATM Card?
There are differences between a debit card and an ATM card to note:
• A debit card can be used to make withdrawals at an ATM, but it also can be used to make purchases and to pay bills.
• An ATM card can be used only to get funds from a checking or savings account at an ATM machine.
Is it Better to Use a Credit Card or Debit Card?
As with most financial tools, it’s up to each individual to decide what works best for them. Here are some ways to evaluate the pros and cons of using a debit card vs. a credit card.
Budgeting
Using a debit card for a majority of transactions may make it easier to stick to your budget, because you can spend only what you have in your account. You aren’t borrowing money as you would with a credit card, so you may find yourself paying more attention to every purchase and whether you can really afford it.
With a credit card, it can be tempting to pay now and worry about the bill later. If you’re super disciplined about paying off your entire credit card balance every month, that might work for you.
But if, like many Americans, you’re likely to carry forward a balance on your credit card (or cards) every month, the debt could eventually grow out of control with interest.
Convenience
Both debit and credit cards are easy to use, but there are a few ways in which debit cards may have an edge when it comes to convenience.
• It’s easier and cheaper to get quick cash with a debit card. You can get a cash advance with a credit card, but you may have to pay a hefty fee and a higher interest rate on the advance. And with a cash advance you could be charged interest starting on the day you receive the money — there’s no grace period as there is when you make a purchase with a credit card.
• You may be able to get a physical cash advance when making a purchase. That benefit usually isn’t available with a credit card.
• It’s generally easier to get a debit card than a credit card. Most financial institutions will automatically give customers a debit card when they open an account. Getting a credit card can be harder, especially if you’re under 18, don’t have any verifiable income, have a poor (or no) history with credit, or lack the typically required identification documents. The requirements are tougher for credit cards because lenders want to be sure their borrowers are capable of repaying their debts.
Penalty Fees
No matter what kind of card you use — debit or credit — you could face a penalty fee if you spend more money than you currently have available.
With a debit card, you may incur an overdraft fee if you spend more than you have in your account (when making a signature purchase, for example, or when using autopay).
With a credit card, you could face an over-limit fee (if you push your balance over your credit limit), a late-payment fee if you fail to make your minimum monthly payment, or a returned payment fee if for some reason your payment isn’t accepted.)
Rewards
Credit cards can be more likely to offer extra perks than debit cards, such as cash-back rewards or points that can be used for travel, though some debits do offer points and rewards.
Spending Limits
One of the things that can make a debit card really useful is that it’s difficult to spend more than you have. But that also can be a drawback if you need to make an expensive purchase. Even if you have a hefty amount of money in your account, you may encounter a daily spending limit when using a debit card.
Those daily limits are meant to protect account holders by limiting the amount fraudsters could spend with a stolen debit card. But if you aren’t aware you have a limit or don’t know what the limit is, you could get an unpleasant surprise when making a major purchase. Don’t know what a debit card’s limit is? Ask your bank.
If you find out you have a debit limit and feel it’s too low, you may be able to request an increase.
Of course, credit cards have spending limits, too, in the form of available credit. Those who go over their credit limit could have their card declined or they might have to pay a fee. Credit card users can check their monthly statement online or in person, or call customer service to see where they stand.
Building Credit
This may seem like a bit of irony, but even though consumers may be trying to be financially responsible by using a debit card whenever they can, they won’t be directly helping their credit score.
Lenders often use credit scores to determine if a person qualifies for a loan or credit card, or a better interest rate when borrowing money. It reflects an individual’s past credit history and shows how well they’ve handled credit in the past.
When someone uses a debit card to pay for goods and services, the money is coming from their own account, so it doesn’t impact their borrowing record. If you use a debit card to stay out of debt and to make car or student loan payments on time, though, it might indirectly help your credit standing.
Safety
A debit card is linked to your bank account, so if a thief gets hold of your physical card or just your card number, any money they take is yours — not the bank’s, as would be the case with a stolen credit card.
And that could cause a lot of problems if you don’t notice and report the problem swiftly, according to the Federal Trade Commission (FTC) .
Debit card use is protected by the Electronic Fund Transfer Act (EFTA), which gives consumers the right to challenge fraudulent charges. But card holders have to act with some speed to get full federal protection.
And those protections aren’t quite as substantial as the federal law that covers credit card theft, the Fair Credit Billing Act (FCBA).
If your debit card is lost or stolen, you could have zero liability if you report it before any unauthorized charges occurred. If you report a lost or stolen card within two business days, your loss may be limited to $50. But if you wait more than 60 calendar days after you receive your statement to make a report, you could lose all the money a thief drains from any account linked to your debit card.
That may sound scary, but if your debit card is backed by a credit card network (like Visa or Mastercard), you likely have the same “zero liability” protections credit card users have.
Debit Card Alternatives
If you don’t have a debit card or prefer not a use one, here are some options:
• Cash. It’s still a form of payment that’s accepted at many retail locations.
• A check. For paying bills or making purchases (typically from smaller vendors), you may be able to write a check.
• Prepaid cards (also called prepaid debit cards in some cases). Available at various retail stores, these cards hold the amount of cash you put on them. Some are meant for one-time use; others can be reloaded with additional funds through an app, direct deposit, money transfer, or with cash at a store that offers this service.
Prepaid cards usually work at any ATM or retail location that accepts the card’s payment network. However, there are pros and cons of prepaid debit cards. They tend to come with more fees and fewer protections than traditional debit cards.
Banking With SoFi
Debit cards are typically offered along with a checking account. You can use a debit card to quickly get cash, either from an ATM or by using the cash back function offered by many merchants. You can also use your debit card to purchase goods and services, and even use it for autopay. Because you are using the cash you have on deposit, you don’t accrue any interest fees, but you are likely not establishing your credit either. These cards can be a convenient aspect of your daily financial life.
Looking for a debit card that provides perks and protections but frowns on account fees? SoFi Checking and Savings may be the right choice for you. Open an account and receive a World Debit Mastercard®, which offers contactless payment, purchase protection, and a cash back rewards program. And, withdrawing cash is fee-free at 55,000+ Allpoint Network ATMs worldwide.
SoFi: Helping you spend smarter.
FAQ
Are there debit card fees?
Typically, debit card use does not incur fees. However, if you use it at a non-network ATM to withdraw cash, you could be hit with a fee. Also, if you overdraft your account when swiping, that could incur charges. Lastly, the checking account that it’s connected to may or may not be fee-free.
What do the numbers on a debit card mean?
The numbers on a debit card are similar to the numbers on a credit card: They identify the industry issuers involved and uniquely capture your account number.
Are debit cards safe?
Debit cards are typically safe, but they can be stolen or lost, which could allow someone to make unauthorized transactions. Plus, the hackers of the world are usually at work, trying to steal people’s information. That said, using a PIN helps protect transactions, and if you report the loss or theft of your debit card within two business days, your liability should be capped at $50. Some cards offer zero-liability protection.
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.
SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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Who needs a vacation? You do! The average American has almost 10 unused vacation days sitting around, according to a recent Qualtrics survey.
Why don’t we take those days off that we earned? There are a variety of reasons, such as work deadlines, childcare issues, and, of course, money…or lack thereof. Travel can get expensive, especially if you are craving a trip that involves a pricey plane ticket.
But whether your travel dreams have you strolling through Paris, eating dozens of flaky croissants, or cozied up in a cabin at a stunning state park, there’s a method to making it possible. Smart budgeting and saving tactics can help you gather the funds you need to use the PTO that’s coming to you.
Read on to learn:
• How much to save for vacation
• How to start a vacation fund
• How to grow your travel fund.
The Importance of Emergency Savings
Sure, it can be tempting to pick up on a whim and travel somewhere, without even glancing at your checking account. But that can be somewhat risky business, financially speaking. And so can prioritizing a vacation fund when you don’t have much money in the bank.
Before you think about funding a vacation, you should consider saving for life’s emergencies first. And a prime way to do that is by establishing a healthy amount of money in your emergency fund.
To build an emergency fund, a general rule of thumb is to have enough money to cover at least three to six months’ worth of expenses socked away. It’s totally okay to start off with a small fund and build your way up over time. Even depositing $20 per paycheck into the fund can be a wise start. This account may be for a true emergency, such as a car breaking down, an unexpected move, paying rent after being laid off, or a visit to the emergency room. What isn’t a good use for your emergency fund? A sale on plane tickets to Hawaii doesn’t count, sorry to say.
Beyond emergency funds, it may be a good idea to ensure you’ve paid off any high-interest debt before allocating your money toward a vacation.
How Much to Save for Vacation
Once your emergency reserves are on good footing, you can take the first step in saving for a vacation by opening a separate account earmarked for travel. Keeping it in the same bank as the rest of your money could allow you to easily keep track of how much you’ve saved. It can also make it a bit simpler to transfer extra cash into your vacation account.
• Pro tip: Many financial institutions will let you name the account, which is seriously worth doing. It might be harder to be motivated to contribute to account XXX924 than your “Valentine’s Day in Paris” Fund. Go ahead, and give it a good name so you know what you’re working towards.
• Another smart move is to automate savings. You can set up automatic deposits into this account each week or month, depending on your pay cycle and what you’re comfortable with. You could even allocate a specific amount to be auto deposited right from your paycheck. That way, it’s like you never even hit your checking account, where it can tempt you to go shopping and have a fancy dinner. You won’t see the money until you’re ready to go on vacation.
Now, about how much to save. Here are a couple of approaches to try:
• Some people like to establish an amount of their paycheck to siphon off into travel savings. Perhaps it’s 5% of your take-home pay, or an amount like $50. Once it hits a certain figure ($500 or $1,000), you can then dig in and start your specific planning.
• For many, though, building a budget makes the dream real. You can scout out transportation and lodging costs, among other items by doing online research. You can add food, entertainment, excursions, and other potential expenses and come up with the figure you’ll need. Then divide that by how long you have to save, and you’ve determined your monthly savings goal.
So if you need $2,400 for your trip and have eight months till the date you want to travel, you’ll need to set aside $300 per month.
Get up to $300 when you bank with SoFi.
Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!
Doing Some Research on Your Dream Vacation
As briefly mentioned, research can be the foundation of your trip planning. And it’s often a really fun enterprise, whether you are a moodboard or a Pinterest sort of person. Decide what kind of vacation you want to have — be it a surf, snow, hiking, adventure, leisure, city, or country escape — then start looking into destinations that suit your desires. Maybe a friend took a cool 30th birthday trip to Iceland that you want to emulate, or you are in search of a few budget-friendly spring break destinations. Start searching! Some guidelines:
• Once you pick a spot, you can look at things like average hotel pricing, average food cost, transportation costs (including the flight, drive, boat, or train there as well as a car rental, taxi, or ridesharing service for when you’re there), average excursion cost, and add in a bit extra for entertainment expenses.
• Don’t forget to budget for hidden fees, such as resort fees, rental fees, and taxes. You may want to call the hotel’s concierge to get those numbers if they aren’t displayed, as they can add up rather quickly. Also, you may want to ensure your number crunching includes an “extra” slush fund for those “just in case” moments.
• If hotels look to be a bit too pricey in your intended destination, you could always look for cost-cutting accommodations. There are always hostels, and some are adding amenities these days that make them less barebones.
• You might consider places that will let you stay for free in exchange for services. You could try signing up on websites like Rover to swap dog sitting services in exchange for a free place to stay. Websites like Mind My House also bring together people looking for house sitters and those looking for accommodations. Check out the listings and see if any fit your vacation needs.
If you have an estimate of how much it will cost, now you just have to figure out how to save for a vacation. Consider these ideas:
• Dividing your projected vacation cost by the months you have to save and stashing cash away is a tried-and-true method. By doing so, you can watch your trip fund grow and get you closer to your trip.
• Some people like to use round-up apps or the “change jar” method to also boost their savings.
How to start a vacation fund is simple: You make that first deposit, But next, learn some other ways to keep building towards your travel goal.
Using Windfalls to Your Advantage
While working toward your vacation, you could use any financial windfalls to your advantage. Consider these sources:
You could always create a windfall for yourself by taking on a low-cost side hustle as you save for your vacation.
Working a side job or taking on freelance work you have the skillset for could help you save money faster to get the vacation show on the road. And the best part is, if you save using your side gig money, you won’t even need to touch your savings or primary paycheck.
Some pointers:
• Think about what you’re after: Something that will help your career in the long-term, or perhaps something that will simply earn you a bit of quick cash?
• If you’re hoping it could help your career growth, you could try tackling a side job that’s connected to your goals. For example, if you’re hoping to be a writer, scout article writing or copywriting gigs. Want to be a photographer? Build a website and offer your services.
• If it’s just quick cash you need, think local and urgent. Could you sub in at a busy cafe on weekends or do odd-jobs through various apps like TaskRabbit or Fiverr?
• Decide how much you’re willing to put into a side hustle. Often, side gigs require you to work before or after your regular nine-to-five, which could mean giving up your nights and weekends. But, again, all that extra work could pay off for either your career or your short-term goals.
Making a Little Extra Cash While on Vacation
You could always try putting your assets to work for you while you’re away to help pay for your vacation. If you own your home or apartment or your landlord allows it, you might rent your space on websites like Airbnb or VRBO. You may be able to earn a hefty sum.
Have a car? That can be rented out on websites like Turo, too.
The Takeaway
If you’re planning a vacation, dreaming about it and planning where you’ll go and what you’ll see can be a fun pursuit. But you’ll also need to save for it. That can be accomplished by saving from your paycheck, stashing away any windfalls, and putting energy towards earning additional money.
As you save, you need a good place to keep your cash securely and help it grow. The SoFi Checking and Savings Account can be a smart option. You’ll be able to easily keep track of progress on each of your vaults (including one that’s your vacation fund), you’ll enjoy a competitive annual percentage yield (APY), and other benefits. And when it’s time to travel, you can use ATMs within the Allpoint® Network without any fees.
SoFi Checking and Savings: The smart, simple way to save.
FAQ
How does a vacation fund work?
A travel fund is an account that helps you save the amount needed to take a trip. Typically, you add to it regularly (manually or by automatically depositing some of your paycheck) until you reach your goal amount. Having the money in an interest-bearing account can help you grow your money more quickly.
Where should I put vacation money?
If you want to grow your trip fund money, it’s wise to put it in a savings account where it’s liquid but earning interest. Look for a secure bank that offers a healthy annual percentage yield (APY). These high-interest or high-yield accounts are often found with no fees and low or no minimum balance requirements at online banks. Because these banks don’t have bricks-and-mortar locations, they can pass the savings onto customers.
What is a reasonable vacation budget?
A reasonable vacation budget will depend on your particular plans. Are you going to a lavish resort in the Mediterranean for two weeks or to a cabin at a local park for the weekend? Whatever your travel style may be, making a budget is critical. By researching transportation, lodging, food, entertainment, and excursion costs in advance, you can likely figure out your savings goal.
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.
SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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.
Buying your first house is a major move, even if the home itself is tiny. Becoming a homeowner can be a great way to start putting down some roots and building equity. And just because it’s called a “starter home” doesn’t necessarily mean you’re twenty-something when you go shopping for one. For many people, the purchase of a first, maybe-not-forever house can come years or decades later.
But what exactly makes a good starter home? How do you know when to jump into the housing market? There are many variables to factor in, such as price, location, type of home, the sort of mortgage you’ll get, your personal finances, and more.
Read on to learn answers to such questions as:
• Why should you buy a starter home?
• Should you buy a starter home or wait?
• How do you buy a starter home?
What Is a Starter Home?
The first step in deciding “Should I buy a starter home?” is understanding what exactly that “starter home” term means. A starter home is loosely defined as a smaller property that a first-time buyer expects to live in for just a few years.
The home could be a condo, townhouse, or single-family home. But generally, when you purchase a starter home, you anticipate outgrowing it — maybe when you get married or have a couple of kids, or because you want more space, a bigger yard, or additional amenities.
A starter house could be brand-new, a fixer-upper, or somewhere in between, but it’s usually priced right for a buyer with a relatively modest budget.
That modest budget, though, may need to be loftier than in years past. The 2022 price of a starter home was $325,000, according to Realtor.com, up 48% from $220,000 in 2019.
That might sound a little intimidating, but remember, that’s the median price. Depending on where you live, there may be entry-level homes selling at significantly lower price points.
Unless you’re a big fan of packing and moving — not to mention the often-stressful process of selling one home and then buying another, or buying and selling a house at the same time — you may want to stay in your starter home for at least two to five years.
There can be significant financial reasons to stick around for a while:
• Home sellers are typically responsible for paying real estate agents’ commissions and many other costs. If you haven’t had some time to build equity in the home, you might only break even or even lose money on the sale.
• You could owe capital gains taxes if you’ve owned the home for less than two years and you sell it for more than you paid.
Of course, if there’s a major change in your personal or professional life — you’re asked to relocate for work, you grow your family, or you win the lottery (woo-hoo!) — you may need or want to sell sooner.
What Is a Forever Home?
A forever home is one that you expect to tick all the boxes for many years — maybe even the rest of your life. It’s a place where you plan to put down roots.
A forever home can come in any size or style and at any cost you can manage. It might be new, with all the bells and whistles, or it could be a 100-year-old wreck that you plan to renovate to fit your home decorating style and vision.
Your forever home might be in your preferred school district. It might be close to friends and family — or the golf club you want to join. It’s all about getting the items on your home-buying wish list that you’ve daydreamed about and worked hard for.
At What Age Should You Buy Your Forever Home?
There’s no predetermined age for finding and moving into a forever home. Some buyers plan to settle in for life when they’re 25 or 30, and some never really put down roots.
But according to data from the 2022 Home Buyers and Sellers Generational Trends Report from the National Association of Realtors® Research Group, buyers in the 57 to 66 age range said they expected to live in their newly purchased home longer than buyers from other age groups, with an expectation of 20 years of residence.
Younger buyers (ages 23 to 31) and older buyers (75 to 90) said they expected to stay put for 10 years.
The median expectation for buyers of all ages was 12 years.
Are you contemplating “Should I buy a starter home?” Here are some of the main advantages of buying a starter home:
• Becoming a homeowner can bring stability to life. A starter home comes with a feeling of “good enough for now” that, for some buyers, is just the right amount of commitment without feeling stuck in the long term.
• Buying a starter home is also a great way to try on aspects of homeownership that renters take for granted, like making your own repairs and mowing your own yard. The larger the house, the more work it usually brings. With a starter home, you can start small.
• Buying a starter home is also an investment that could see good returns down the road. While you live in the home, you’ll be putting monthly payments toward your own investment instead of your landlord’s. Depending on market conditions, you could make some money when you decide to trade up, either through the equity you’ve gained when you sell or recurring income if you choose to turn it into a rental property.
• Homeowners who itemize deductions on their taxes may take the mortgage interest deduction. Most people take the standard deduction, which for tax year 2022 (filing by Tax Day 2023) is:
◦ $25,900 for married couples filing jointly
◦ $12,950 for single taxpayers and married individuals filing separately
◦ $19,400 for heads of households
• Some homeowners who itemize may be able to do better than the standard deduction. For instance, in some states, a homestead exemption gives homeowners a fixed discount on property taxes. In Florida, for example, the exemption lowers the assessed value of a property by $50,000 for tax purposes.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Downsides of Starter Homes
Next, consider the potential disadvantages of snagging a starter home:
• While the idea of buying a home just big enough for one or two is a romantic one, the reality of finding a starter home that’s affordable has gotten tougher.
The outlook has been so bleak, especially in some larger cities, that some Millennials are opting out of the starter-home market altogether, choosing instead to rent longer or live with their parents and save money.
Who can blame Millennials for taking a different approach to homeownership than their parents? The older members of this generation came of age during the financial crisis of 2008-09, which included a bursting housing bubble that put many of their parents — and even some of them — underwater on a mortgage they may not have been able to afford in the first place.
• When thinking about whether you should buy a starter home, know that it may require a lot of sweat equity and cash. If you buy a bargain-priced first home, you may be on the hook for spending much of your free time and cash to restore it.
• Another con of buying a starter home is the prospect of having to go through the entire home-buying process again, possibly while trying to sell your starter home, too. Keeping your house show-ready, paying closing costs, going through the underwriting process, packing, moving, and trying to time it all so you avoid living in temporary lodging is a big endeavor that, when compared with the relative ease of moving between apartments, can be seen as not worth the effort.
• In some circumstances, you may have to pay capital gains taxes on the sale of your starter home when you move up.
If you aren’t ready to jump into a starter home, an alternative could be a rent-to-own home.
How to Find Starter Homes for Sale
Are you ready to start the hunt? Here are some tips for finding a starter home:
• Work with an experienced real estate agent who knows your market and spends their days finding homes in your price range.
• Rethink your house criteria. If you are buying a starter home and figured you’d shop for a three-bedroom, you may find more options and less heated competition if you go for a two-bedroom house.
• Take a big-picture view. If you’re a young couple with no kids yet, maybe you don’t need to purchase in the tip-top school district. After all, you are at least several years away from sending a little one to their first day of school Or, if prices are super-high for single-family houses, could buying a condo or a townhome work well for a number of years?
As noted above, the typical cost of a starter home in the U.S. was $325,000. Keep in mind, however, that there is a huge variation in costs. A rural home may be much less expensive than shopping for a starter home that’s within short commuting distance of a major city, like New York or San Francisco.
Is Buying a Starter Home Worth It?
Deciding whether a starter home is worth it is a very personal decision. One person might be eager to stop living with their parents and be ready to plunk down their savings for a home. Another person might have a comfortable rental in a great town and be reluctant to take on a home mortgage loan as they continue to pay down their student loan debt.
When you consider the pros and cons of starter homes listed above, you can likely decide whether buying a starter home is worth it at this moment of your life.
Tips on Buying a Starter Home
If you’re tired of renting or living with your parents but don’t have the cash flow necessary for anything more than a humble abode, a starter home could be a great way to get into real estate without breaking the bank. Some pointers on how to buy a starter home:
• Before you buy any home — starter or otherwise — it’s important to sit down and crunch the numbers to see how much home you can realistically afford. Lenders look at your debt when considering your debt-to-income ratio (DTI), but they aren’t privy to other regular monthly expenses, such as child care or kids’ activity fees. Be sure to factor those in.
• You also may want to look at how much you can afford for a down payment. While a 20% down payment isn’t required to purchase a home, most non-government home loan programs do require some down payment.
It’s possible to buy a home with a small down payment: The average first-time homebuyer puts down about 6% of a home’s price as a down payment, according to the latest data from the National Association of Realtors (NAR).
• You’ll want to explore different mortgage loan products as well, possibly with a mortgage broker. You’ll have to decide between adjustable and fixed rate offerings, 20-year vs. 30-year mortgages, and different rates. You may also be in a position to buy down your rate with points. Getting a few offers can help you see how much house you can afford, as can using an online mortgage calculator.
• The decision to purchase a starter home is about more than just money, though. You may also want to consider your future plans and how quickly you might grow out of the house, whether you’re willing to live where the affordable houses are, and if you’ll be happy living without the amenities you’ll find in a larger house.
• Other factors to consider are your current state of financial health and your mental readiness for a DIY lifestyle (which includes your willingness to fix your own leaky toilet or pay a plumber.)
• If you’re ready to make the leap, there are plenty of home ownership resources available to help you get started on the path to buying your starter home. Your first step might be to check out a few open houses and to research mortgage loans online.
The Takeaway
Buying a starter home can be a good way to get your foot in the door of homeownership, but it’s important to consider your financial situation and your plans for the next two to five years or more before buying a starter house.
Are you house hunting and mortgage shopping? SoFi offers fixed-rate mortgage loans with as little as 3% down for first-time homebuyers, plus competitive rates and variable terms.
SoFi Mortgage Loans: The smart, simple source for financing.
FAQ
How much money should you have saved to buy a starter home?
The average down payment is about 6% of the home purchase price. That number can help you see how much you want to have in the bank, though mortgage loans may be available with as little as 3% down or even zero down if you are shopping for a government-backed mortgage. Worth noting: If your down payment is under 20%, you may have to pay private mortgage insurance.
What is considered a good starter home?
A good starter home will likely check off some of the items on your wish list (square footage, location, amenities, etc.) and will not stretch your budget too much. You want to be able to keep current with other forms of debt you may have as well as pay your monthly bills (which will likely include mortgage, property tax, home maintenance, and more). That financial equation may help you decide whether to buy a starter home or wait.
How much do people spend on a starter home?
As of 2022, the average price for a starter home in the U.S. was $325,000. However, prices will vary greatly depending on location, size, style, and condition.
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.
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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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.
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.
There are a grand total of seven states that don’t tax retirement income, and that’s because 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 2023, there are 14 states that don’t tax pensions, and 37 states 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.
Understanding State Income Tax
As of 2023, 43 states tax individual income. Of those, 41 states levy taxes on wage and salary income, while seven states do not assess individual income tax. The state of New Hampshire exclusively taxes dividend and interest income, while 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 double-digit tax rates include Hawaii (11%), New York (10.90%), New Jersey (10.75%), and Washington, D.C. (10.75%). Aside from the states that have no income tax, the lowest marginal tax rate belongs to North Dakota, which has an income tax rate of 2.90%.
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.
Altogether, there are 14 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
Pension income excluded from state tax
Illinois
Pension income excluded from state tax
Mississippi
Pension income excluded from state tax
Nevada
No state income tax
New Hampshire
Only taxes interest and dividend income
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.
37 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 37 states and the District of Columbia do not tax Social Security benefits. 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
Nevada
No state income tax
Alaska
No state income tax
New Hampshire
Only taxes interest and dividend income
Arizona
Not included in income tax calculations
New Jersey
Not included in income tax calculations
Arkansas
Not included in income tax calculations
New York
Not included in income tax calculations
California
Not included in income tax calculations
North Carolina
Not included in income tax calculations
Delaware
Not included in income tax calculations
North Dakota
Exempt from taxation
Florida
No state income tax
Ohio
Not included in income tax calculations
Georgia
Not included in income tax calculations
Oklahoma
Not included in income tax calculations
Hawaii
Not included in income tax calculations
Oregon
Not included in income tax calculations
Idaho
Not included in income tax calculations
Pennsylvania
Not included in income tax calculations
Illinois
Not included in income tax calculations
South Carolina
Not included in income tax calculations
Indiana
Not included in income tax calculations
South Dakota
No state income tax
Iowa
Not included in income tax calculations
Tennessee
No state income tax
Kentucky
Not included in income tax calculations
Texas
No state income tax
Louisiana
Not included in income tax calculations
Virginia
Not included in income tax calculations
Maine
Not included in income tax calculations
Washington
Only taxes capital gains for high-income earners
Maryland
Not included in income tax calculations
Washington, D.C.
Not included in income tax calculations
Massachusetts
Not included in income tax calculations
Wisconsin
Not included in income tax calculations
Mississippi
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. Montana will also see a change to its tax rate structure in 2024, and Social Security benefits will be taxed the same as they are at the federal tax level.
8 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. They include:
• Alaska
• Florida
• 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.
12 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 12 states that don’t levy taxes on retirement income derived from these sources:
• Alaska
• Florida
• Illinois
• Mississippi
• New Hampshire
• Nevada
• New Hampshire
• Pennsylvania
• South Dakota
• Tennessee
• Texas
• Wyoming
31 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, 31 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
• Iowa
• Kansas
• Louisiana
• Maine
• Massachusetts
• Michigan
• Minnesota
• Mississippi
• Missouri
• Nevada
• New Hampshire
• New Jersey
• New York
• North Dakota
• Ohio
• Pennsylvania
• South Dakota
• Tennessee
• Texas
• Washington
• West Virginia
• Wisconsin
• Wyoming
7 States That Don’t Tax Retirement Income
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 really easy to determine which states don’t tax retirement income whatsoever. But if you were to boil it down to a list that accurately answers the question “which states don’t tax retirement income,” it would mirror the short list of states that don’t tax income at all.
• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee
• Texas
• Wyoming
In addition, as mentioned above, while New Hampshire and Washington state do tax certain types of income, they don’t really tax most forms of retirement income. So if you live in these states, your Social Security benefits and pension benefits can go further when it comes to covering your retirement expenses.
8 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 seven 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
• Hawaii
• Illinois
• Iowa
• Mississippi
• New Hampshire
• 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, however, 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.
For example, the state of Virginia 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 protect taxpayers who work in states other than the one in which they’re legal residents from being hit with double taxation.
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 making a decision to move could be beneficial.
If you’re wondering about other ways to help make your retirement savings tax efficient, SoFi can help. With SoFi Invest, you can open a traditional or Roth IRA, and you can build, or add to your investment portfolio right from your smartphone or other device. SoFi doesn’t charge commissions (you can read the full fee schedule here), and SoFi members have access to complimentary advice from professionals.
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
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, the District of Columbia, Nevada, and Tennessee.
Which states have no 401(k) tax?
States that do not tax 401(k) distributions are generally the same states that don’t tax income. Those states include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. New Hampshire and Washington don’t tax 401(k) distributions either.
Which states do not tax pensions?
States that do not tax pensions include the seven states that have no income tax — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming — as well as New Hampshire and Washington. Additionally, five states — Alabama, Hawaii, Illinois, 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 seven states that don’t have any sorts of state income tax. You can also consult a professional.
Which states are tax-free for Social Security?
There are a grand total of 37 states that don’t tax Social Security benefits, and that list includes the seven states that don’t tax income at all. Aside from those states, 29 others (and Washington, D.C.) do not, specifically, tax Social Security benefits.
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