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Flexible spending accounts, or FSAs, are special savings accounts offered through some employer benefit plans. They allow the account holder to pay for certain out-of-pocket medical and dependent care costs with tax-free money.

However, FSAs come with some rules and regulations. For instance, FSA rules cap the amount of money that can be placed in the account each year ($3,400 for 2026)^[1], and also dictate which types of expenses qualify for an FSA distribution.

Still, FSAs can be a powerful tool for covering unavoidable medical costs that could otherwise wreak havoc on your finances.

Flexible Spending Account Explained

FSAs are savings programs offered through employers — which means that self-employed people aren’t eligible. Those who are self-employed may be covered through an employed spouse’s plan, or they may choose to open a Health Savings Account (HSA), if they qualify.

FSAs are also sometimes called flexible spending arrangements, and they can cover you, your spouse, and your dependents. There are also a few sub-types of FSAs, such as dependent care FSAs (DCFSAs) and limited purpose FSAs (LPFSAs).

Recommended: Benefits of Health Savings Accounts

Flexible Spending Account Rules: An Overview

FSA contributions work similarly to employer-sponsored retirement plans like 401(k)s: a certain amount of pre-tax wages is withheld each pay period and contributed to the account.

The account holder elects how much to withhold at the beginning of the plan year — and, importantly, they may not be able to change it unless there’s a change in employment or family status. That means it’s important to think the decision through carefully.

But unlike a 401(k), the funds placed into an FSA aren’t tax-deferred — they’re actually tax-free. That means they aren’t included in the account holder’s total taxable income, nor are taxes due when distributions are made.

Recommended: Tax Credits vs. Tax Deductions: What’s the Difference?

How Much Can I Contribute to My FSA?

In 2026, account holders may contribute up to a maximum of $3,400 to their FSAs (up from $3,300 in 2025). If an account holders’ spouse is enrolled in an FSA plan, they can also contribute up to $3,400 in 2026, for a household maximum of $6,800. Employers may also place limits on the amount an employee can elect to be contributed, up to this federal cap.

Unused Funds: FSA Rollover and Reimbursement Rules

Another rule regarding FSAs is the fact that, generally speaking, unused FSA funds are forfeited.

In other words, FSAs are “use it or lose it” accounts; the money that isn’t used for qualified expenses by the end of the plan year typically can’t be rolled over into the next.

Thus, account holders may want to be cautious to avoid over-contributing to the plan and carefully estimate how much they think they’ll need to spend on out-of-pocket health expenses. Setting up a budget may help with this.

However, there are some exceptions to this rule. Depending on the employer’s policy choice, they may allow for a “grace period” or a carry-over option — one or the other, but not both, and they’re not legally required to offer either.

Recommended: How to Negotiate Medical Bills

What Can a Flexible Spending Account Be Used For?

Given the contribution limits and forfeiture rules of flexible spending accounts, FSA account holders usually want to be careful about calculating how much money they might be able to use — otherwise, significant amounts of their paycheck might end up right back in their employers’ hands.

FSA funds can be used for a wide range of out-of-pocket health care expenses, such as deductibles, coinsurance, and copayments. You can also use your FSA funds to pay for dental/orthodonture expenses, prescription eyeglasses/contacts, medications, psychological counseling, hearing aids, and many health-related over-the-counter items (including sunscreen).

It’s a good idea to check with your FSA provider to confirm which products and services are eligible to make sure you will be able to get reimbursed.

Keep in mind, too, that FSAs generally work in conjunction with other types of health benefits and coverage, and funds can’t be used to reimburse services that are covered under other health plans.

It might be a valuable exercise to write out all of the expected medical expenses you’ll face as a family at the beginning of the plan year in order to decide how much to contribute, including additional coverages, in order to avoid over-contribution. While nobody can predict the future, some routine expenses can be foreseen — and a little bit of planning might save a lot of forfeited funds in the end.

Recommended: 15 Creative Ways to Save Money

Taking Distributions from an FSA

The process for taking distributions from an FSA can vary based on the plan. In some cases, distributions are made from an FSA to reimburse the account holder for medical expenses they’ve incurred. Some FSAs also have a debit, credit, or stored value card that can be used to pay directly for qualifying expenses.

In order to take a distribution, the account holder may have to provide a written statement from the doctor or medical service provider that specifies the medical expense incurred, as well as a statement documenting that the expense hasn’t been covered by any other health plan. In other situations, a receipt may be sufficient documentation in order to be reimbursed.

FSA reimbursements are only available for verifiable medical expenses that have already been incurred, rather than expenses the account holder plans to incur in the future. (In other words, you can’t write to the FSA and tell them you’re going to the doctor next month.)

It’s also important to note that your FSA funds are available to you on the first day of your plan year, regardless of how much you’ve contributed.

Let’s say you elect to contribute $2,000 for the plan year, which runs January through December. Your employer will likely deduct that amount from your paychecks in equal increments over the course of the year. However, if you get hit with a $1,000 eligible medical expense on January 15th, you can still tap your FSA to cover it — you don’t have to wait until you’ve contributed $1,000.

Is a Flexible Spending Account Worth It?

A flexible spending account can be a helpful tool, but it’s not the only option for footing medical bills.

For one thing, $3,400 might not even scratch the surface of some common medical procedures, such as childbirth.

Furthermore, although the tax-free nature of FSAs is attractive, the prospect of forfeiting parts of a paycheck is definitely not — and there are other ways to save cash for medical expenses and other emergencies which offer not just flexibility, but growth.

If you want more flexibility, you might open a savings account offering a high yield and create an emergency fund to help pay medical expenses. Just keep in mind that you won’t get the tax benefits that come with an FSA. If you have a high-deductible health plan, you might choose to open an HSA. Funds in an HSA aren’t subject to use-it-or-lose-it rules and can be invested. Plus, the plan can go with you if you change employers.

The Takeaway

The tax benefits of the FSA can make them an appealing and useful tool, especially for those who know they’ll spend a decent amount out of pocket on health care.

But if you’re not sure how much you’ll be spending on health care, opening a high-yield savings account earmarked for health and medical expenses could be a smart move. This allows you to earn interest on your money, and you won’t have to forfeit any funds you don’t end up spending. Or, you might do both — contribute to an FSA while also setting money aside in a savings account you can tap if your expenses exceed your estimate or go beyond the cap for FSA savings.

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.

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
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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.

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SOBNK-Q225-013
CN-Q425-3236452-108

A health savings account (HSA) and a Health Maintenance Organization (HMO) are both meant to help with medical costs, but there are vast differences between the two. An HSA acts as a personal saving account, where you can set aside tax-free dollars to be used toward out-of-pocket health care expenses. An HMO is typically a low-cost health insurance plan.

It’s tough to directly compare an HSA vs. HMO, as they serve different functions. But understanding how each works, and their pros and cons, can help lower medical costs and keep more money in your wallet. Here, you will learn:

•   How an HSA works

•   How to set up an HSA

•   The pros and cons of an HSA

•   How an HMO works

•   How to set up an HMO

•   The pros and cons of an HMO

•   The key differences of an HSA vs. HMO

•   How to fund healthcare costs.

What is a Health Savings Account (HSA)?

A health savings account (HSA) allows individuals to put away pre-tax dollars to be used for future medical purposes. These funds can be used for copays, dental and eye care, and a host of other expenses not covered by a healthcare plan.

Here’s the catch: You have to be enrolled in a high-deductible health plan (HDHP). An HDHP is geared to offer you lower monthly health-insurance payments. The downside, however, is that you could get hit with a lot of out-of-pocket expenses before meeting the plan’s high deductible.

That’s where a Health Savings Account (HSA) comes in. The money in your HSA can help bridge the gap between your high deductible and your pocketbook.

How Does a Health Savings Account Work?

A Health Savings Account works similarly to other kinds of saving accounts. You can transfer funds and pay bills online. You are free to withdraw HSA funds at any time to pay for health costs not covered by your HDHP.

Employers can contribute to your HSA, with direct deposits made straight from payroll. HSA funds can be used for you or any family member covered by your HDHP.

The money in your HSA can remain in the account and roll over every year, accumulating tax-free interest. You can even use your HSA for retirement. After the age of 65, you can start withdrawing from your HSA with no penalty.

There are rules and limits to an HSA. For tax year 2025, the IRS limits contributions to no more than $4,300 for individuals and $8,550 for families with HDHP coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution. For 2026, HSA contribution limits are $4,400 for individuals and $8,750 for families. Those 55 and older can contribute an additional $1,000 as a catch-up contribution.

How to Set Up an HSA

Setting up a tax-advantaged HSA is pretty straightforward. If you are self-employed, take the time to compare different HSAs online. Many of them have reasonable fees (or none) and minimal requirements.

If your HSA is offered directly through your employer, that makes the decision easy.

The steps to enroll in an HSA are not unlike opening a bank account. You’ll need proof of a government-issued ID, your Social Security number, and proof of your enrollment in a HDHP.

Once you have set up an HSA, you may be able to opt for regular, automatic deposits straight from your paycheck or your bank account, and start reaping the benefits of using a health savings plan.

Pros of an HSA

A health savings plan provides a range of advantages, including:

•   Covering out-of-pocket medical expenses, including dental costs, copays, new eye glasses, and hearing aids. The IRS has a lengthy list of all the goodies you can buy with your tax-free dollars.

•   Lowering taxable income. HSA contributions go into your account before taxes, so you could pay less taxes down the line.

•   Investing for the future. You can opt to have your HSA money invested in chosen mutual funds once you reach a minimum requirement balance.

•   Covering health expenses for your family. HSA benefits anyone who is currently covered by your high-deductible savings plan.

•   Rollover contributions. Unused contributions don’t vanish. They roll over into the next year, growing and accumulating tax-free interest.

•   Retirement savings. Any unused funds can be used to boost retirement savings. They can be withdrawn after the age of 65, and spent as you please. You can put the money toward a beach vacation or any other purpose.

•   Portability. If you move or change jobs, the money is still yours. You don’t have to surrender it.

Cons of an HSA

There are some potential disadvantages to having an HSA, including:

•   Penalties for non-qualified expenses. Before the age of 65, the IRS can impose a substantial 20% penalty on monetary amounts spent on unapproved purchases. This money will also be viewed as taxable income.

•   Monthly/annual fees. Some health savings accounts may charge a low monthly service fee. Service fees tend to be no more than $5 per month. Some HSAs allow you to invest in mutual funds after your balance reaches a certain amount. If you choose this option, you will probably be charged an annual account management fee.

•   Unable to contribute. Budgets can get tight. There are times when you might not be able to regularly contribute money to your HSA.

•   Tracking for your taxes. HSA expenditures and contributions must be reported on your tax return. Keeping tabs on those transactions can be tedious.

•   Monetary losses. As with an IRA or 401(k), if you choose to invest your HSA money in mutual funds, your balance can experience gains and losses as the market fluctuates. These investments are not FDIC-insured like bank accounts are.

💡 Quick Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.

What is a Health Maintenance Organization (HMO)?

A Health Maintenance Organization (HMO) is a type of health insurance plan. An HMO tends to offer lower monthly or annual premiums and a specific pool of doctors. If you stay within their network of healthcare providers, you may have lower out-of-pocket costs and, unlike with a HDHP, a lower deductible or even no deductible at all.

How Does a Health Maintenance Organization Work?

A health maintenance organization (HMO) plan consists of a group of insurance providers who have contracted certain doctors and hospitals to work with them. These medical professionals and facilities agree on a payment rate for their services, which can translate into reduced costs for you.

As long as you use the doctors in the HMO network, you are eligible for medical services that cost less. HMOs typically require a referral from an in-network primary care physician in order to receive low-cost services from specialists, such as an oncologist or gynecologist.

Many health insurance companies offer HMO plans as a coverage option. An individual can choose the HMO plan and go through the steps of enrollment, either on paper or via an online form. The process includes selecting your primary care physician.

Pros of an HMO

The advantages of enrolling in an HMO plan can include:

•   Lower monthly premiums versus other insurance plans.

•   Lower out-of-pocket expenses when you see your GP or specialists, have tests done, and access other kinds of medical care.

•   Lower prescription costs for your medications.

•   Fewer medical claims, as the paperwork is filed in-network.

•   Appointing a primary care doctor, whose office may coordinate and advocate for your various medical services.

Cons of an HMO

There are disadvantages of having an HMO, including:

•   Limited access to doctors and facilities. You must stay within their network of providers or risk paying out-of-pocket, except in the case of certain emergencies.

•   A new primary care doctor. If your current doctor isn’t in the HMO’s network, you’ll have to find a new primary care physician. For some people, this may be a difficult switch to make.

•   Referral requirements. To see a specialist and have your HMO pay for those services, you’ll need referrals; you can’t just look up a specialist and see them.

•   Strict definitions. There are times when you must very specifically meet requirements to have medical services paid for. This can be important to know during emergencies and other medical situations.

Can You Have Both an HMO and HSA?

Yes. There is no real rivalry happening with HMOs vs. HSAs, as they are so different. But if you are wondering if you can have an HSA with an HMO, here’s what you need to know. You can use an HSA with an HMO, as long as the HMO qualifies as a high-deductible health plan (HDHP). Since HMOs are often low cost healthcare plans, an HMO may not qualify as an HDHP. Check with your particular plan to see.

Key Differences Between an HMO vs HSA

•   An HSA acts like a savings account, an HMO is a health plan offering savings through lower-cost healthcare options.

•   An HSA does not offer a network of doctors, but can offer investment opportunities and help you save for retirement.

Recommended: How to Save for Retirement

Ways to Fund Healthcare Costs

Besides enrolling in a low-cost HMO, or opening an HSA, there are other ways to save money and pay for medical expenses.

Flexible Spending Account

A flexible spending account (FSA) acts very much like an HSA. It is similar to a savings account, and can be used for medical expenses and saving for retirement.

An FSA, however, can only be obtained through an employer. Self-employed people cannot have an FSA.

Money Market Account

A money market account works like a traditional checking or savings account. You could use the money for healthcare costs, or any other purchases. Money market accounts can offer a higher interest rate than other saving accounts, but there may be a higher minimum account balance required and more costly fees.

Savings Account

A traditional savings account can be set up with a bank or a credit union. Funds in a savings account can be spent on anything. But savings accounts may offer lower interest rates than other types of saving options. However, high-yield savings accounts may help close that gap somewhat.

The Takeaway

Enrolling in a health savings plan (HSA) or a health maintenance organization plan (HMO) provides different advantages, with the same goal in mind: saving you money on healthcare costs. Enrolling in one (or both) can bring a sense of security for you and your family and help you hold onto more of your hard-earned cash.

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

FAQ

Is an HSA better than an HMO?

An HSA isn’t better; it’s just different. An HSA is a kind of savings account for people enrolled in a high-deductible healthcare plan and is used to pay for medical costs. An HMO is a low-cost health insurance plan that gives you access to a specific network of healthcare professionals.

What happens to an HSA if you switch to an HMO?

You can keep and use an HSA with any type of health plan, as long as it qualifies as a high-deductible health plan (HDHP). If not, you can keep and access the money in the HSA, but you can no longer contribute to it.

What happens to my HSA if I cancel my insurance?

You can continue to use the money in the HSA account, but can no longer contribute to it until you’re enrolled in another HDHP.

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.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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.

Photo credit: iStock/Halfpoint
SOBK0324004
CN-Q425-3236452-107

In addition to spoiling them with toys and ice cream, many grandparents also want to help secure a solid financial future for their grandkids. That can mean setting up a custodial account, considering tax-advantaged savings options, and exploring other ways to start building a child’s wealth.

Below, you’ll learn about the different ways to save money for your grandkids, plus the pros and cons of each.

Why Open an Account for Grandchildren?

Sure, your grandkids might prefer a new video game or Lego set, but you’ll do them a favor, today and tomorrow, by opening a savings account for them. Here are a couple of good reasons to open a savings account for your grandchildren.

Teaching Financial Literacy Early

Money management skills are crucial, but personal finance education can be virtually nonexistent during school. It’s not typical for schools to teach kids how to balance a checkbook, how to invest in stocks, how to save for a down payment on a house, and how to file taxes.

Thus, it’s up to parents — and grandparents — to equip the next generation with financial literacy. Opening an account for your grandchildren can help teach them concepts such as interest, budgeting, and investing.

Getting a Head Start for College and Life

While teaching children how to manage money can give them a head start on the path to financial wellness, so too can providing them with a nest egg that can grow over time through various savings and investing accounts. Consider these options:

•   When you open a savings account for grandchildren early on, they could wind up having a sizable chunk of cash in young adulthood to put toward their first car or even a house down payment.

•   A 529 college savings plan could help them avoid taking on too much debt from student loans.

•   Retirement accounts, such as a Roth IRA, can help them achieve their retirement goals, even if those are more than half a century away. Remember, the earlier someone starts investing, the more they stand to earn in the long run.

Types of Accounts to Consider

Grandparents have many options when it comes to opening an account for their grandchildren, including:

Savings, CDs, and Bonds

Many banks and credit unions offer savings accounts designed for kids. Do a quick search for “best savings accounts for grandchildren” or you could start by seeing if your own bank offers such an account.

Having money in savings at an early age will let your grandkids benefit from compounding interest, especially if you find a high-yield savings account for kids.

You can also consider opening a certificate of deposit (CD) or purchasing savings bonds for your grandchildren. CDs are savings accounts that typically provide a higher interest rate than a standard savings account in exchange for keeping your money in the account for a fixed period of time. Savings bonds, issued by the U.S. Department of Treasury, are a very low risk, longer-term investment that provides interest in return for lending the government money.

With both of these options, the money is less liquid, but if the CD or bond matures when your grandchild is older, they stand to have a reliable source of funds they can use in future years.

Custodial Accounts (UGMA/UTMA)

Beyond savings accounts for grandchildren, you can consider helping your grandkids actually start investing with a custodial account, through the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). Once your grandchild is between 18 and 25 (the exact age varies by state), they’ll take control of the account.

These accounts are taxable (meaning you will owe taxes on interest earned) and have no contribution limits. They’re an easy way to purchase stocks, mutual funds, and other securities for your grandchild — and you can even transfer your own securities into the custodial account.

529 College Savings Plans

The cost of college tuition continues to skyrocket, meaning it’s never too early to start saving. There are several benefits of a 529 college savings plan: While the contributions to this qualified tuition plan aren’t tax-deductible, your grandchild’s distributions from the account tax-free at the federal level, as long as the money is used for qualifying expenses.

A 529 college savings may have “college” in the name, but your grandchild can also use it for other higher education programs, such as a trade or vocational school. You can also roll over 529 funds into a Roth IRA if your grandkids don’t use all (or any) of the funds.

Contributions to a grandchild’s 529 account are not deductible on your federal income tax return. However, many states offer either a deduction or credit for this kind of contribution.

Another consideration: Contributions to 529s are subject to annual gift tax exclusion limits, which are $19,000 for individuals and $38,000 for married couples in 2025 and 2026. If you were to put more than that into a 529 for a grandchild, you would need to file a gift tax return (though this does not mean you’ll owe any gift tax).

IRAs for Minors

Similar to custodial investment accounts, you can open custodial retirement accounts for your grandchildren, including a traditional IRA and a Roth IRA. While your grandkid won’t benefit from this account for decades, starting them early on the path to retirement savings means they could have considerably more money to work with when they reach retirement age.

However, it’s important to note that opening an IRA requires the child to have earned income in a given year. For teens, this can make sense. For a newborn, it is unlikely to be a viable option.

When making contributions to an IRA for a grandchild, note that the amount you deposit is subject to the annual federal gift tax exclusion limit.

Choosing the Right Account

Not sure how to choose the right savings account for your grandchildren? Here are some things to consider:

Comparing Interest Rates and Fees

If you’re opening a savings account, compare interest rates — you want an account with a high yield so that the money compounds more quickly over time. For example, currently the average interest rate for standard savings accounts is 0.45%, while the figure for high-yield savings accounts (often from online-only banks) can be several times that number.

For custodial accounts, you’ll want options with low or no fees. It can be wise to shop around and see what options you have from different banks and brokerage firms.

Recommended: How Old Do You Have to Be to Open a Bank Account?

Accessibility and Withdrawal Rules

Certain accounts allow your grandchildren to access funds sooner, while others (like IRAs) have strict rules about when they can withdraw funds and what the funds can be used for (as is the case with 529 plans). Think about the specific timeline and use case you envision for your grandchildren. Sometimes, opening more than one type of account makes sense, depending on how many goals you want to enable for your children’s kids.

Tax Implications and Benefits

Some accounts have tax-deductible contributions; others have tax-free withdrawals. For example, withdrawals from a 529 account are not usually taxable, provided they are used for qualified educational expenses. With a Roth IRA, withdrawals made after your child is older than 59 ½ (as hard as that may be to imagine) are not taxable. With a traditional IRA, taxes are paid when the money is withdrawn, usually in retirement, and are taxable.

Speaking with a financial advisor can help you understand the tax implications of each type of account you’re considering to better understand what you might pay — and what your grandchild might pay.

Setting up and Contributing to the Account

Ready to open a savings account for your grandchildren? Here’s how it works:

Opening and Funding the Account

Follow the bank’s or investment firm’s guidelines for opening the account. You will likely need some specific information from the grandchild’s parents to open the account. You’ll also need to deposit money into the account to start the nest egg. Custodial accounts may even let you transfer your own assets into the account.

Automatic Transfers and Recurring Contributions

If you’d like, you may be able to set up recurring transfers into the account. Perhaps you want a recurring transfer every holiday season or on your grandchild’s birthday. Work with the financial institution to set up these contributions — and perhaps find out how other loved ones might be able to contribute as well.

Monitoring and Managing the Account

After opening an account, it’s important to monitor it and see how the funds grow over time. Just as importantly, once your grandchild is a little older, it’s a good idea to sit down and review the account with them:

•   If it’s a savings account, walk them through how compound interest works.

•   If it’s a 529 plan, talk to them about college costs and how student loans work.

•   If it’s a custodial account, talk to them about the basics of investing and the importance of saving for retirement.

The Takeaway

It’s never too early to start thinking about your grandchild’s future. Savings accounts, 529 plans, and custodial accounts offer several ways for you to give them money that will help them with college, general expenses, and even retirement.

While saving for grandkids is important, it’s also crucial that you take care of your own finances.

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

FAQ

What are the contribution limits for custodial accounts?

There are no contribution limits for UGMA/UTMA custodial accounts, but you can only contribute up to a certain amount to avoid gift-tax implications (this changes each year). Contribution limits apply for custodial IRAs just as they would for regular IRAs.

Can grandparents open a 529 plan for grandchildren?

Yes, grandparents can open a 529 plan for grandchildren. If the grandchild’s parents have already set up a 529 plan, grandparents can also contribute to that plan directly. This will simplify account management and withdrawals for the recipient of the funds.

What happens to the account if the grandchild doesn’t need the funds?

If a grandchild doesn’t need funds from a 529 plan for college, they can still use them for trade or vocational schools or roll them into an IRA. Grandparents can also reassign the 529 plan to another grandchild.

Photo credit: iStock/gorodenkoff

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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 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.

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.

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It’s that time of year again: Typically, by midnight on April 15, taxpayers must e-file or mail their federal and, if applicable, state tax returns for the previous calendar tax year to avoid penalty. Well before the deadline, though, it’s wise to do your prep work, hunting down the necessary documents, finding a tax pro or software to help you through the process, and learning about any new tax deductions or credits you might be eligible for.

It can definitely be a challenge to get organized, but by following certain steps, you can be ready to file properly and on time. Here, we’ll help you along with important tips, including:

•   When is tax filing season?

•   How do you prepare for tax season?

•   Should you hire a tax pro?

•   Which tax documents do you need?

•   By when do you need to file taxes?

When Is Tax Filing Season?

Tax season typically begins at the end of January. If you are filing your 2025 tax return, the IRS will start accepting and processing your tax returns at the end of January 2026.

You should receive a Form W-2 by January 31st or, with any mail delay, soon thereafter. The same deadline applies to 1099-NEC forms for independent contractors. Each financial institution that paid you at least $10 of interest during the year must send you a copy of the 1099-INT by January 31st as well.

The due date for individuals to file their taxes is usually April 15th of a given year or, if that falls on a weekend, the next following weekday.

It’s generally not a good idea to wait until the last minute to prepare for tax filing. If you work for one employer, your taxes may not be complicated, but if you have side gigs or you’re self-employed, your tax returns can take a while to fill out.

13 Tax Prep Tips for 2025

Before filing, here’s how to prepare for the upcoming tax season.

1. Decide on Hiring a Pro or DIY

You can either prepare and file your taxes on your own or hire a professional. If you choose the latter, you can go to a tax preparation service like H&R Block or contact a local accountant or other tax pro. Some people feel more secure with a professional who can guide them through the process, know the latest deductions, and perhaps help them avoid IRS audit triggers.

The costs for a professional vary, and the more complicated a return is, generally the higher the costs will be.

The IRS has a tool where taxpayers can find a tax preparer near them with credentials or select qualifications. Doing so will mean paying a fee. How much? Tax preparation could run anywhere from $300 to $600 (or more), depending on where you live, how complicated your tax situation is, and how your tax professional charges for services.

Or, you could use software which is likely to cost less but require a greater investment of your time. For instance, TurboTax prices range from $89 and up, depending on whether you need additional features, like online assistance.

Recommended: How to File Taxes for Beginners

2. Consider Other Tax-Filing Options

You might also want to try this alternative: IRS Free File lets you prepare and file your federal income tax online for free. There are two options, based on income.

•   You can file on an IRS partner site if your adjusted gross income was approximately $89,000 or less. This is a guided preparation, and the online service does all the math.

•   Those whose income is higher and who know how to prepare their own taxes can choose the fillable forms option. The forms-based product can do basic calculations but will not provide step-by-step guidance. Also there is no state tax filing with this option.

Recommended: How to Pay Less in Taxes: 9 Simple Steps

3. Collect Tax Documents

Gathering the right papers is an important part of preparing for tax season. By the end of January, you should have received tax documents from employers, brokerage firms, and others you did business with. They include a W-2 for a salaried worker and Form 1099-NEC if you were self-employed (gig worker or freelancer) or did independent contractor work amounting to over $600 last year.

Employers will send the documents in the mail or electronically.

Investors might receive these forms:

•   1099-B, which reports capital gains and losses

•   1099-DIV, which reports dividend income and capital gains distributions

•   1099-INT, which reports interest income

•   1099-R, which reports retirement account distributions

Other 1099 forms include:

•   1099-MISC, which reports miscellaneous income (such as prize money or payments received for renting space or equipment)

•   1099-Q, which reports distributions from education savings accounts and 529 accounts

If you won anything while gambling, you’ll need to fill out Form W-2G. If you paid at least $600 in mortgage interest during the year, you’ll receive Form 1098, which you’ll need to claim a mortgage interest tax deduction.

A list of income-related forms can be found on the IRS website.

Last year’s federal return, and, if applicable, state return could be good reminders of what was filed last year and the documents used. That can help you pinpoint any missing tax documents.

4. Look Into Deductions and Credits

Wondering whether to take the standard deduction or itemize deductions? The higher figure is the winner.

The vast majority of Americans claim the standard deduction, the number subtracted from your income before you calculate the amount of tax you owe.

For tax year 2025, the standard deductions are:

•   $15,750 for single filers and those married filing separately

•   $31,500 for those married filing jointly

•   $23,625 for heads of household

Individuals aged 65 or older or who are blind can claim an additional standard deduction of $1,550 (for married filers) or $1,950 (for single or head of household filers).

For tax year 2026, the standard deductions are:

•   $16,100 for single filers and those married filing separately

•   $32,200 for those married filing jointly

•   $24,150 for heads of household

Individuals aged 65 or older or who are blind can claim an additional standard deduction of $1,600 (for married filers) or $2,000 for single or head of household filers).

Individuals interested in itemizing tax deductions can look into whether they’re eligible for a long list of deductions like a home office (and, if eligible, whether to use the simplified option for computing the deduction), education deductions, healthcare deductions, and investment-related deductions.

•   You own a home and the total of your mortgage interest, points, mortgage insurance premiums, and real estate taxes are greater than the standard deduction.

•   Your state and local taxes (including real estate, property, income, and sales taxes) plus your mortgage interest exceed the standard deduction.

•   You spent more than 7.5% of your adjusted gross income for out-of-pocket medical expenses.

Then there are tax credits, a dollar-for-dollar reduction of the income tax you owe. So if you owe, say, $1,500 in federal taxes but are eligible for $1,500 in tax credits, your tax liability is zero.

There are family and dependent credits, healthcare credits, education credits, homeowner credits, and income and savings credits. Taxpayers can see the entire tax credits and deductions list on the IRS website.

Recommended: What Tax Bracket Am I In?

5. Be Sure to Include Dependents’ IDs

Details count (a lot) when filing your return, and one important point to include is the Social Security numbers for any children and other dependents. If you omit this, you may lose any dependent credits, like the Child Tax Credit, that you qualify for.

Also know that if you are divorced, only one parent can claim children as dependents.

6. Update Beneficiary Designations

On the subject of children, tax time is a good time to review and update beneficiary designations. While it won’t change your tax-filing calculations, it will potentially reduce the tax burden your beneficiaries may pay on what they inherit after you die.

7. Add to Your Retirement Contributions

As you get ready for tax filing, it’s wise to check your progress towards your retirement fund (hopefully you have one). Money that you put into a 401(k), 403(b), or other tax-deferred account reduces your taxable income. In other words, it helps minimize your tax bill. The contributions you make generally aren’t taxed until you decide to withdraw funds.

If you feel you can afford to contribute more, know that for 2025, the 401(k) contribution limit for employees is $23,500, with an additional $7,500 for catch-up contributions for taxpayers who are age 50 or older. For 2026, the 401(k) contribution limit is $24,500, with an additional $8,000 for those age 50 or older. In both 2025 and 2026, those aged 60 to 63 may contribute up to an additional $11,250 instead of $7,500 and $8,000 respectively, thanks to SECURE 2.0.

8. Take Any Required Minimum Distributions

Another tax-filing tip: If you’ve reached retirement age, make sure you take any distributions that are necessary. You generally must begin taking annual withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts starting with the year you turn 73. When you reach the minimum age, you can delay your first mandatory withdrawal until April 1 of the following year. From then on, however, you must take your annual required minimum distribution (RMD) by December 31. If you miss the RMD deadline, you may get hit with a penalty of 25% of the RMD total.

9. Make a Final Estimated Tax Payment

Taxpayers who do not have taxes withheld from their paychecks can pay estimated taxes every quarter to avoid owing a big chunk of change come Tax Day.

Quarterly estimated taxes are typically due on April 15th, June 15th, and September 15th, with the fourth due on January 15th of the following year.

10. Apply for a Payment Plan If Needed

What happens if you discover, at tax filing time, that you can’t pay the full amount you owe? One option is to pay as much as you can and then set up a payment plan with the IRS for the rest. This is a method that gives you a longer time frame in which to pay what you owe. Depending on whether you have a short-term or long-term IRS payment plan , there may be setup fees.

11. File Electronically

Here’s an important tip: Prioritize filing electronically, especially if you anticipate receiving a refund. Electronic returns can typically be processed more quickly than paper ones, which means you’ll get your infusion of cash that much sooner.

Another benefit of filing this way is that your return is much less likely to have errors. Electronic returns tend to have just 0.5% with errors. But for “hard copy” paper returns, that number ratchets up to about 21% with mistakes.

12. Decide Whether to File for an Extension

What if you don’t quite have your act together and your tax filing materials ready to roll on time? It happens. If you need more time to prepare your federal tax return, you can electronically request an extension by filing Form 4868 by the April tax filing due date. This gives you until October 15 to file a completed return. Just keep in mind: Even if you file an extension, you are required to pay any taxes you may owe by the April deadline.

13. Avoid Tax Season Scams

Filing a tax return can be enough to keep you busy without worrying about getting scammed. But unfortunately, there are fraudsters out there, trying to take advantage of the season. For instance, you might get an email, phone call, or even a text message that says it’s from the IRS. They may say there’s an issue with a return of yours and that they need to speak with you ASAP. Don’t fall for it: The only way the IRS will ever communicate with you is via U.S. mail, unless you are involved in some kind of litigation with them.

The Benefits of Getting Prepared Early

Now that you’ve learned more about tax filing, here are some reasons to get started sooner rather than later on your return.

•   Avoid deadline anxiety. For some people, procrastination can lead to a lot of stress as the filing date approaches. They risk having to pull the proverbial all-nighter to get their return done on time or wind up blowing the deadline. By starting sooner, you can chip away at the process of pulling materials together and completing forms and breathe a little easier.

•   Dodge processing delays. If you file earlier, you are likely to slip in before the deluge of returns hits the IRS’s offices. You might even get your refund (if you’re due one) sooner.

•   Take the time to plan. Perhaps you know you’re going to owe money. Or, maybe you’re not sure if that’s the case. In either scenario, starting the tax-filing process earlier will give you time to see what you may owe and then figure out how to pay any funds that are due.

Recommended: Tax Preparation Checklist 2025: Documents You Need to Gather

The Takeaway

“Tax prep” isn’t a phrase signaling that big fun is on the way, but putting off the inevitable probably isn’t the best choice. To save yourself stress, you’ll want to prepare for tax season as early as possible by gathering documents and information, choosing a preparer or getting ready to DIY, and learning about tax credits and deductions.

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

FAQ

When can I start filing my taxes?

Tax filing season typically begins at the end of January. For example, the Internal Revenue Service (IRS) will begin accepting 2025 tax returns on or about January 26, 2026.

Should I use a tax preparer?

It’s a personal choice whether to hire a tax preparer or file your taxes yourself. A tax preparer will likely reduce the time you have to spend doing your taxes and can apply their professional knowledge to help you know what credits and deductions you qualify for. However, you will have to pay a fee for this service, which could run anywhere from $300 to $600 (or more), depending on where you live and how complicated your tax situation is.

What documents do I need to prepare for tax season?

You’ll need to gather a variety of documents for tax season, including income received (W-2s and/or 1099s to show earnings, and 1099s that reflect interest and dividends earned), records of deductions (relating to home ownership, charitable donations, medical expenses, educational costs, and the like). And, of course, you’ll need personal information like your Social Security number and that of any dependents.

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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