Jan
14
2025
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Investment Strategies By Age

By | Growing Wealth, invest, Investing, Life & Career | No Comments

Your age is a major factor in the investment strategy you choose and the assets you invest in. The investments someone makes when they’re in their 20s should look very different from the investments they make in their 50s.

Generally speaking, the younger you are, the more risk you may be able to tolerate because you’ll have time to make up for investment losses you might incur. Conversely, the closer you are to retirement, the more conservative you’ll want to be since you have less time to recoup from any losses. In other words, your investments need to align with your risk tolerance, time horizon, and financial goals.

Most important of all, you need to start saving for retirement now so that you won’t be caught short when it’s time to retire. According to a 2024 SoFi survey of adults 18 and older, 59% of respondents had no retirement savings at all or less than $49,999.

Here is some information to consider at different ages.

Investing in Your 20s

In your 20s, you’ve just started in your career and likely aren’t yet earning a lot. You’re probably also paying off debt such as student loans. Despite those challenges, this is an important time to begin investing with any extra money you have. The sooner you start, the more time you’ll have to save for retirement. Plus, you can take advantage of the power of compounding returns over the decades. These strategies can help get you on your investing journey.

Strategy 1: Participate in a Retirement Savings Plan

One of the easiest ways to start saving for retirement is to enroll in an employer-sponsored plan like a 401(k). Your contributions are generally automatically deducted from your paycheck, making it easier to save.

If possible, contribute at least enough to qualify for your employer’s 401(k) match if they offer one. That way your company will match a percentage of your contributions up to a certain limit, and you’ll be earning what’s essentially free money.

Those who don’t have access to an employer-sponsored plan might want to consider setting up an individual retirement account (IRA). There are different types of IRAs, but two of the most common are traditional and Roth IRAs. Both let you contribute the same amount (up to $7,000 in 2024 and 2025 for those under age 50), but one key difference is the way the two accounts are taxed. With Roth IRAs, contributions are not tax deductible, but you can withdraw money tax-free in retirement. With traditional IRAs, you deduct your contributions upfront and pay taxes on distributions when you retire.

Strategy 2: Explore Diversification

As you’re building a portfolio, consider diversification. Diversification involves spreading your investments across different asset classes, such as stocks, bonds, and real estate investment trusts (REITs). One way twentysomethings might diversify their portfolios is by investing in mutual funds or exchange-traded funds (ETFs). Mutual funds are pooled investments typically in stocks or bonds, and they trade once per day at the end of the day. ETFs are baskets of securities that trade on a public exchange and trade throughout the day.

You may be able to invest in mutual funds or ETFs through your 401(k) or IRA. Or you could open a brokerage account to begin investing in them.

Strategy 3: Consider Your Approach and Comfort Level

As mentioned, the younger an individual is, the more time they may have to recover from any losses or market downturns. Deciding what kind of approach they want to take at this stage could be helpful.

For instance, one approach involves designating a larger portion of investments to growth funds, mutual funds or ETFs that reflect a more aggressive investing style, but it’s very important to understand that this also involves higher risk. You may feel that a more conservative approach that’s less risky suits you better. What you choose to do is fully up to you. Weigh the options and decide what makes sense for you.

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Investing in Your 30s

Once you’re in your 30s, you may have advanced in your career and started earning more money. However, at this stage of life you may also be starting a family, and you likely have financial obligations such as a mortgage, a car loan, and paying for childcare. Plus, you’re probably still paying off your student loans. Still, despite these expenses, contributing to your retirement should be a top priority. Here are some ways to do that.

Strategy 1: Maximize Your Contributions

Now that you’re earning more, this is the time to max out your 401(k) or IRA if you can, which could help you save more for retirement. In 2024, you can contribute up to $23,000 in a 401(k) and up to $7,000 in an IRA. In 2025, you can contribute up to $23,500 in a 401(k) and up to $7,000 in an IRA. (If you have a Roth IRA, there are income limits you need to meet to be eligible to contribute the full amount, which is one thing to consider when choosing between a Roth IRA vs. a traditional IRA.)

Strategy 2: Consider Adding Fixed-Income Assets to the Mix

While you can likely still afford some risk since you have several decades to recover from downturns or losses, you may also want to add some fixed-income assets like bonds or bond funds to your portfolio to help counterbalance the risk of growth funds and give yourself a cushion against potential market volatility. For example, an investor in their 30s might want 20% to 30% of their portfolio to be bonds. But, of course, you’ll want to determine what specific allocation makes the most sense for your particular situation.

Strategy 3: Get Your Other Financial Goals On Track

While saving for retirement is crucial, you should also make sure that your overall financial situation is stable. That means paying off your debts, especially high-interest debt like credit cards, so that it doesn’t continue to accrue interest. In addition, build up your emergency fund with enough money to tide you over for at least three to six months in case of a financial setback, such as a major medical expense or getting laid off from your job. And finally, make sure you have enough funds to cover your regular expenses, such as your mortgage payment and insurance.

Investing in Your 40s

You may be in — or approaching — your peak earning years now. At the same time, you likely have more expenses, as well, such as putting away money for your children’s college education, and saving up for a bigger house. Fortunately, you probably have at least 20 years before retirement, so there is still time to help build your nest egg. Consider these steps:

Strategy 1: Review Your Progress

According to one rule of thumb, by your 40s, you should have 3x the amount of your salary saved for retirement. This is just a guideline, but it gives you an idea of what you may need. Another popular guideline is the 80% rule of aiming to save at least 80% of your pre-retirement income. And finally, there is the 4% rule that says you can take your projected annual retirement expenses and divide them by 4% (0.04) to get an estimate of how much money you’ll need for retirement.

These are all rough targets, but they give you a benchmark to compare your current retirement savings to. Then, you can make adjustments as needed.

Strategy 2: Get Financial Advice

If you haven’t done much in terms of investing up until this point, it’s not too late to start. Seeking help from financial advisors and other professionals may help you establish a financial plan and set short-term and long-term financial goals.

Even for those who have started saving, meeting with a financial specialist could be useful if you have questions or need help mapping out your next steps or sticking to your overall strategy.

Strategy 3: Focus on the Your Goals

Since they might have another 20-plus years in the market before retirement, some individuals may choose to keep a portion of their portfolio allocated to stocks now. But of course, it’s also important to be careful and not take too much risk. For instance, while nothing is guaranteed and there is always risk involved, you might feel more comfortable in your 40s choosing investments that have a proven track record of returns.

Investing in Your 50s

You’re getting close to retirement age, so this is the time to buckle down and get serious about saving safely. If you’ve been a more aggressive investor in earlier decades, you’ll generally want to become more conservative about investing now. You’ll need your retirement funds in 10 years or so, and it’s vital not to do anything that might jeopardize your future. These investment strategies by age may be helpful to you in your 50s:

Strategy 1: Add Stability to Your Portfolio

One way to take a more conservative approach is to start shifting more of your portfolio to fixed-income assets like bonds or bond funds. Although these investments may result in lower returns in the short term compared to assets like stocks, they can help generate income when you begin withdrawing funds in retirement since bonds provide you with periodic interest payments.

You may also want to consider lower-risk investments like money market funds at this stage of your investment life.

Strategy 2: Take Advantage of Catch-up Contributions

Starting at age 50, you become eligible to make catch-up contributions to your 401(k) or IRA. In 2024 and 2025, you can contribute an additional $7,500 to your 401(k) for a total contribution of $30,500 for 2024, and $31,000 for 2025 if you max out your plan.

In 2024 and 2025, the catch-up contribution for an IRA is an additional $1,000 annually for a total maximum contribution of $8,000 for each year. This allows you to stash away even more money for retirement.

Strategy 3: Consider Downsizing

Your kids may be out of the house now, which can make it the ideal time to cut back on some major expenses in order to save more. You might want to move into a smaller home, for instance, or get rid of an extra car you no longer need.

Think about what you want your retirement lifestyle to look like — lots of travel, more time for hobbies, starting a small business, or whatever it might be — and plan accordingly. By cutting back on some expenses now, you may be able to save more for your future pastimes.

Investing in Your 60s

Retirement is fast approaching, but that doesn’t mean it’s time to pull back on your investing. Every little bit you can continue to save and invest now can help build your nest egg. Remember, your retirement savings may need to last you for 30 years or even longer. Here are some strategies that may help you accumulate the money you need.

Strategy 1: Get the Most Out of Social Security

The average retirement age in the U.S. is 65 for men and 63 for women. But you may decide you want to work for longer than that. Waiting to retire can pay off in terms of Social Security benefits. The longer you wait, the bigger your monthly benefit will be.

The earliest you can start receiving Social Security Benefits is age 62, but your benefits will be reduced by as much as 30% if you take them that early. If you wait until your full retirement age, which is 67 for those born in 1960 or later, you can begin receiving full benefits.

However, if you wait until age 70 by working longer or working part time, say, the size of your benefits will increase substantially. Typically, for each additional year you wait to claim your benefits up to age 70, your benefits will grow by 8%.

Strategy 2: Review Your Asset Allocation

Just before and during retirement, it’s important to make sure your portfolio has enough assets such as bonds and dividend-paying stocks so that you’ll have income coming in. You’ll also want to stash away some cash for unexpected expenses that might pop up in the short term; you could put that money in your emergency fund.

Some individuals in their 60s may choose to keep some stocks with growth potential in their asset allocation as a way to potentially avoid outliving their savings and preserve their spending power. Overall, people at this stage of life may want to continue the more conservative approach to investing they started in their 50s, and not choose anything too aggressive or risky.

Strategy 3: Keep investing in your 401(k) as long as you’re still working.

If you can, max out your 401(k), including catch-up contributions, in your 60s to sock away as much as possible for retirement. In 2025, those aged 60 to 63 can take advantage of an extra catch-up provision, thanks to SECURE 2.0: They can contribute $11,250, instead of $7,500, for a total of $34,750. This can be especially helpful if you didn’t invest as much as you ideally should have at earlier ages. Contributing to your 401(k) could also help lower your taxable income now, when you may be in a higher income tax bracket than you were in previous decades.

Also, you can continue to contribute to any IRAs you may have — up to the limit allowed by the IRS, which is $8,000 in 2024 and 2025, including catch-up contributions. If you have a Roth IRA, you will need to meet the income limits in order to contribute.

The Takeaway

Investing for retirement should be a priority throughout your adult life, starting in your 20s. The sooner you begin, the more time you’ll have to save. And while it’s never too late to start investing for retirement, focusing on investment strategies by age, and changing your approach accordingly, can generally help you reach your financial goals.

For instance, in your 20s and 30s you can typically be more aggressive since you have time to make up for any downturns or losses. But as you get closer to retirement in your 40s, 50s, and 60s, your investment strategy should shift and take on a more conservative approach. Like your age, your investment strategy should adjust across the decades to help you live comfortably and enjoyably in your golden years.

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Jan
14
2025
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A Guide to Tax-Efficient Investing

By | Growing Wealth, invest, Investing, Terminology | Comments Off on A Guide to Tax-Efficient Investing

As the saying goes: It’s not how much you earn, it’s how much you keep. And when you make money from your investments you need to consider the impact taxes might have on your earnings.

Fortunately, there are a range of tax-efficient investment strategies that can help minimize the bite that taxes take out of your returns.

What is tax-efficient investing, and how does it work? By understanding the tax implications of different types of accounts, as well as the types of investments you choose (e.g. stocks, bonds, mutual funds), you can determine the most tax-efficient strategies for your portfolio.

The Importance of Tax-Efficient Investing

Investing comes with an assortment of costs, and the taxes you pay on investing profits can be one of the biggest. By learning how to be a more tax-efficient investor, you may be able to keep more of what you earn.

The Impact of Taxes on Returns

Investment tax rules are complicated. Profits from many stock and bond investments are taxed at the capital gains rate; but some bonds aren’t taxed at all. Qualified dividends are taxed in one way; non-qualified dividends another. Investments in a taxable account are treated differently than those in a tax-advantaged account.

And, of course, there is the process of applying investment losses to gains in order to reduce your taxable gains — a strategy known as tax-loss harvesting.

In addition, the location of your investments — whether you hold them in a taxable account or a tax-advantaged account (where taxes can be deferred, or in some cases avoided) — also has an impact on your returns. In a similar way, you can refocus your charitable giving strategy to be tax efficient as well.

Knowing the ins and outs of investment taxes can help you establish a tax-efficient strategy that makes sense for you.


💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Types of Tax-Efficient Accounts

Investment accounts can generally be divided into two categories based on how they’re taxed: taxable and tax-advantaged.

Taxable Accounts

In order to understand tax-deferred and tax-exempt accounts, it helps to first understand taxable accounts, e.g. brokerage accounts. A taxable brokerage account has no special tax benefits, and profits from the securities in these accounts may be taxed according to capital gains rules (unless other rules apply).

Taxable accounts can be opened in the name of an individual or trust, or as a joint account. Money that is deposited into the investment account is post-tax, i.e. income taxes have already been paid or will be paid on those funds (similar to the money you’d put into a checking or savings accounts).

Taxes come into play when you sell investments in the account and make a profit. You may owe taxes on the gains you realize from those investments, as well as earned interest and dividends.

With some securities, like individual stocks, the length of time you’ve held an investment can impact your tax bill. Other investments may generate income or gains that require a different tax treatment.

For example:

•   Capital gains. The tax on an investment gain is called capital gains tax. If an investor buys a stock for $40 and sells it for $50, the $10 is a “realized” gain and will be subject to either short- or long-term capital gains tax, depending on how long the investor held the investment.

   The short-term capital gains rate applies when you’ve held an investment for a year or less, and it’s based on the investor’s personal income tax bracket and filing status — up to 37%.

   The long-term capital gains rate, which is generally 0%, 15%, or 20% (depending on your income), applies when you’ve held an investment for more than a year.

•   Interest. Interest that’s generated by an investment, such as a bond, is typically taxed as ordinary income. In some cases, bonds may be free from state or local taxes (e.g. Treasuries, some municipal bonds).

   But if you sell a bond or bond fund at a profit, short- or long-term capital gains tax could apply.

•   Dividends. Dividends are distributions that may be paid to investors who hold certain dividend stocks. Dividends are generally paid in cash, out of profits and earnings from a corporation — and can be taxed as short- or long-term capital gains within a taxable account.

Recommended: How Do Dividends Work?

But the terms are different when it comes to tax-advantaged accounts.

Tax-Advantaged Accounts

Tax-advantaged accounts fall into two categories, and are generally used for long-term retirement savings.

Tax-Deferred Retirement Accounts

A 401(k), 403(b), traditional IRA, SEP IRA, and Simple IRA fall under the tax-deferred umbrella, a tax structure typical of retirement accounts. They’re considered tax efficient for a couple of reasons.

•   Pre-tax contributions. First, the money you contribute to a tax-deferred account is not subject to income tax; you owe taxes when you withdraw the funds later, e.g. in retirement. Thus the tax is deferred.

This means the amount you contribute to a tax-deferred account for a given year can be deducted from your taxable income, potentially reducing your tax bill for that year.

Speaking hypothetically: If your taxable income for a given year is $100,000, and you’ve contributed $5,000 to a traditional IRA or SEP IRA, you would deduct that contribution and your taxable income would be $95,000. You wouldn’t pay taxes on the money until you withdrew that funds later, likely in retirement.

•   Tax-free growth. The money in a tax-deferred retirement account (e.g. a traditional IRA) grows tax free. Thus you don’t incur any taxes until the money is withdrawn.

•   Potentially lower taxes. By deducting the contribution from your taxable income now, you may avoid paying taxes at your highest marginal tax rate. The idea is that investors’ effective (average) tax rate might be lower in retirement than their highest marginal tax rate while they’re working.

Tax-Exempt Accounts

Typically known as Roth accounts — e.g. a Roth IRA or a Roth 401(k) — allow savers to deposit money that’s already been taxed. These funds, plus any gains, then grow tax free, and qualified withdrawals are also tax free in retirement.

Because contributions to Roth accounts are made post-tax, there is also more flexibility on when the money can be withdrawn. You can withdraw the amount of your contributions tax and penalty free at any time. However earnings on those investments may incur a penalty for early withdrawal, with some exceptions.

Recommended: What Is the Roth IRA 5-Year Rule?

Tax Benefits of College Savings Plans

529 College Savings Plans are a special type of tax-exempt account. The contributions and earnings in these accounts can be withdrawn tax free for qualified education expenses. In some cases you may be able to deduct your contributions from your state taxes, but the rules vary from state to state.

While you can invest the money in these accounts, they are limited in scope so aren’t generally considered one of the broader investment account categories.

Tax-Efficient Accounts Summary

As a quick summary, here are the main account types, their tax structure, and what that means for the types of investments you might hold in each.

•   Generally you want to hold more tax-efficient investments in a taxable account.

•   Conversely, you may want to hold investments that can have a greater tax impact in tax-deferred and tax-exempt accounts, where investments can grow tax free.

Types of Accounts When Taxes Apply Investment Implications
Taxable
(e.g. brokerage or investment account) 		Investors deposit post-tax funds and owe taxes on profits from securities they sell, and from interest and dividends. Investments with a lower tax impact make sense in a taxable account (e.g. long-term stocks, municipal and Treasury bonds).
Tax-deferred (e.g. 401(k), 403(b), traditional, SEP, and Simple IRAs) Investors contribute pre-tax money, but owe taxes on withdrawals. Investments grow tax free until funds are withdrawn, giving investors more tax flexibility when choosing securities.
Tax-exempt
(e.g. Roth 401(k), Roth IRA)		 Investors deposit post-tax funds, and don’t owe taxes on withdrawals. These accounts offer the most tax flexibility as investments grow tax free and investors withdraw the money tax free.

The Tradeoffs of Tax-Free Growth

Because of the advantages tax-deferred accounts offer investors, there are restrictions around contribution limits and the timing (and sometimes the purpose) of withdrawals. Taxable accounts are generally free of such restrictions.

•   Contribution limits. The IRS has contribution limits for how much you can save each year in most tax-advantaged accounts. Be sure to know the rules for these accounts, as penalties can apply when you exceed the contribution limits.

•   Income limits. In order to contribute to a Roth IRA, your income must fall below certain limits. (These caps don’t apply to Roth 401(k) accounts, however.)

•   Penalties for early withdrawals. For 401(k) plans and traditional as well as Roth IRAs, there is a 10% penalty if you withdraw money before age 59 ½, with some exceptions.

•   Required withdrawals. Some accounts, such as traditional, SEP, and Simple IRAs require that you withdraw a minimum amount each year after age 73 (as long as you turned 72 after Dec. 31, 2022). These are known as required minimum distributions (RMDs).

   The rules governing RMDs are complicated, and these required withdrawals can have a significant impact on your taxable income, so you may want to consult a professional in order to plan this part of your retirement tax plan.

When choosing the location of different investments, be sure to understand the rules and restrictions governing tax-advantaged accounts.

Choosing Tax-Efficient Investments

Next, it is helpful to know that some securities are more tax efficient in their construction, so you can choose the best investments for the type of account that you have.

For example, ETFs are considered to be more tax efficient than mutual funds because they don’t trigger as many taxable events. Investors can trade ETFs shares directly, while mutual fund trades require the fund sponsor to act as a middle man, activating a tax liability.

Here’s a list of some tax-efficient investments:

•   ETFs: These are similar to mutual funds but more tax efficient due to their construction. Also, most ETFs are passive and track an index, and thus tend to be more tax efficient than their actively managed counterparts (this is also true of index mutual funds versus actively managed funds).

•   Treasury bonds: Investors will not pay state or local taxes on interest earned via U.S. Treasury securities, including Treasury bonds. Investors do owe federal tax on Treasury bond interest.

•   Municipal bonds: These are bonds issued by local governments, often to fund municipal buildings or projects. Interest is generally exempt from federal taxes, and state or local taxes if the investor lives within that municipality.

•   Stocks that do not pay dividends: When you sell a non-dividend-paying stock at a profit, you’ll likely be taxed at the long-term capital gains rate, assuming you’ve held it longer than a year. That’s likely lower than the tax you’d pay on ordinary dividends, which are generally taxed as income at your ordinary tax rate.

•   Index funds vs. actively managed funds: Generally speaking, index funds (which are passively managed) have less churn, and lower capital gains. Actively managed funds are the opposite, and may incur higher taxes as a result.

Note that actively trading stocks can have additional tax implications because more frequent trades, specifically those that fall into the short-term capital gain category, incur a higher tax rate on gains.

Typically, tax consequences will vary from person to person. A tax professional can help navigate your specific tax questions.

Estate Planning and Charitable Giving

Another important aspect of tax-efficient investing is adjusting your estate plan and establishing a strategy for charitable bequests. Because both these areas — inheritances and philanthropy — can be extremely complex taxwise, it may be wise to consult with a professional.

Taxes and Estate Planning

There are a number of ways to structure inheritances in a tax-efficient manner, including the use of gifts, trusts, and other vehicles. With a sophisticated estate-planning strategy, taxes can be minimized for the donor as well as the receiver.

For example, while there is a federal estate tax, there is no federal inheritance tax. And only five states tax your inheritance as of 2025 (Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania). As of January 1, 2025, Iowa no longer has an inheritance tax.

Yet your heirs may owe capital gains if you bequeath assets that then appreciate. But if you leave stock to your heirs, they can enjoy a step-up in cost basis based on when they inherited the stock, so they’d be taxed on gains from that time, not from the original price at purchase.

Tax Benefits of Charitable Contributions

Tax-efficient charitable giving is possible using a variety of strategies and accounts. For example a charitable remainder trust can reduce the donor’s taxable income, provide a charity with a substantial gift, while also creating tax-free income for the donor.

This is only one example of how charitable gifts can be structured as a win-win on the tax front. Understanding all the options may benefit from professional guidance.


💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good choices shouldn’t stem from strong emotions, but a solid investment strategy.

Advanced Tax-Efficient Strategies

It may also be possible to minimize taxes by incorporating a few more strategies as you manage your investments.

Asset Location Considerations

As noted above, one method for minimizing the tax impact on your investments is through the careful practice of asset location. A well-considered combination of taxable, tax-deferred, and tax-exempt accounts can help mitigate the impact of taxes on your investment earnings.

For example, with some investment accounts — such as IRAs and 401(k)s — your tax bracket can have a substantial impact on the tax you’ll pay on withdrawals. Having alternate investments to pull from until your tax bracket is more favorable is a smart move to avoid that excess tax.

Also, with multiple investment accounts, you could potentially pull tax-free retirement income from a Roth IRA, assuming you’re at least 59 ½ and have held the account for at least five years (also known as the 5-year rule). and leave your company-sponsored 401(k) to grow until RMDs kick in.

Having a variety of investments spread across account types gives you an abundance of options for many aspects of your financial plan.

•   Need to cover a sudden large expense? Long-term capital gains are taxed at a significantly lower rate than short-term capital gains, so consider using those funds first.

•   Want to help with tuition costs for a loved one? A 529 can cover qualified education costs at any time, without incurring taxes or a penalty.

•   Planning to leave your heirs an inheritance? Roth IRAs are tax free and transferrable. And because your Roth IRA does not have required distributions (as a traditional IRA would), you can allow the account to grow until you pass it on to your heir(s).

Tax-Loss Harvesting

Within taxable accounts, there may be an additional way to minimize some of the tax bill created by selling profitable investments: tax-loss harvesting. This advanced move involves reducing the taxes from an investment gain with an investment loss.

For example, an investor wants to sell a few investments and the sale would result in $2,000 in capital gains. Tax-loss harvesting rules allow them to sell investments with $2,000 in total capital losses, effectively canceling out the gains. In this scenario, no capital gains taxes would be due for the year.

Note that even though the investor sold the investment at a loss, the “wash sale” rule prevents them from buying back the same investment within 30 days after those losses are realized. This rule prevents people from abusing the ability to deduct capital gain losses, and applies to trades made by the investor, the investor’s spouse, or a company that the investor controls.

Because this strategy involves the forced sale of an investment, many investors choose to replace it with a similar — but not too similar — investment. For example, an investor that sells an S&P 500 index fund to lock in losses could replace it with a similar U.S. stock market fund.

Recommended: What Are the Benefits of Tax Loss Harvesting?

Tax-Loss Carryover

Tax-loss harvesting rules also allow an investor to claim some of that capital loss on their income taxes, further reducing their annual income and potentially minimizing their overall income tax rate. This can be done with up to $3,000 in realized investment losses, or $1,500 if you’re married but filing separately.

Should your capital losses exceed the federal $3,000 max claim limit ($1,500 if you’re married and filing separately), you have the option to carry that loss forward and claim any amounts excess of that $3,000 on your taxes for the following year.

For example, if you have a total of $5,000 in capital losses for this year, by law you can only claim $3,000 of those losses on your taxes. However, due to tax-loss carryover, you are able to claim the remaining $2,000 as a loss on your taxes the following year, in addition to any capital gains losses you happen to experience during that year. This in turn lowers your capital gains income and the amount you may owe in taxes.

Roth IRA Conversions

It’s also possible in some cases to convert a traditional IRA to a Roth IRA. This is a complicated strategy, with pluses and minuses on the tax front.

•   By converting funds from a traditional IRA to a Roth, you will immediately owe taxes on the amount you convert. The conversion amount could also push you into a higher tax bracket; meaning, you’d potentially owe more in taxes.

•   Unlike funding a standard Roth IRA, there is no income limit for doing a Roth conversion, nor is there a cap on how much can be converted.

•   Once the conversion is complete, you would reap the benefits of tax-free withdrawals from the Roth IRA in retirement.

•   According to the 5-year rule, if you’re under age 59 ½ the funds that you convert to a Roth IRA must remain in your account for at least five years or you could be subject to a 10% early withdrawal penalty.

Final Thoughts on Tax-Efficient Investing

Given the impact of investment taxes on your returns, it makes sense to consider all the various means of tax-efficient investing. After all, not only are investment taxes an immediate cost to you, that money can’t be invested for further growth.

Key Strategies Recap

Once you understand the tax rules that govern different types of investment accounts, as well as the tax implications of your investment choices, you’ll be able to create a strategy that minimizes taxes on your investment income for the long term. Ideally, investors should consider having a combination of tax-deferred, tax-exempt, and taxable accounts to increase their tax diversification. To recap:

•   A taxable account (e.g. a standard brokerage account) is flexible. It allows you to invest regardless of your income, age, or other parameters. You can buy and sell securities, and deposit and withdraw money at any time. That said, there are no special tax benefits to these accounts.

•   A tax-deferred account (e.g. 401(k), traditional IRA, SEP IRA, Simple IRA) is more restrictive, but offers tax benefits. You can deduct your contributions from your taxable income, potentially lowering your tax bill, and your investments grow tax free in the account. Your contributions are capped according to IRS rules, however, and you will owe taxes when you withdraw the money.

•   A tax-exempt account (e.g. a Roth IRA or Roth 401(k)) is the most restrictive, with income limits as well as contributions limits. But because you deposit money post-tax, and the money grows tax free in the account, you don’t owe taxes when you withdraw the money in retirement.

Further Learning in Tax-Smart Investing

Being smart about tax planning applies to the present, to educational expenses, to the future (in terms of taxes you could owe in retirement), and to your estate plan and your heirs as well. Maximizing your tax-efficient strategies across the board can make a significant difference over time.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

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

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1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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14
2025
What Is an FSA Debit Card?

Guide to FSA Debit Cards

By | Family Finances, money, Terminology | Comments Off on Guide to FSA Debit Cards

If you have a flexible spending account, an FSA debit card allows you access these pre-tax dollars you’ve set aside. With an FSA debit card, you can pay for qualifying medical purchases without having to file a reimbursement claim through your employer.

In other words, an FSA debit card can make your healthcare spending that much easier. But it’s important to understand the full story on how these cards work to make sure you get the most out of one.

This guide will coach you through that, including:

•   What is an FSA debit card?

•   How can you get an FSA debit card?

•   How do you use an FSA debit card?

•   What are the pros and cons of an FSA debit card?

•   When should you use your regular debit card instead?

Read on and you’ll learn the best FSA debit card practice so you can benefit from the money in your flexible spending account.

What Is an FSA Debit Card?

An FSA debit card will typically come with your flexible spending account, which is a tax-advantaged account offered through an employer’s benefit package. The funds in your FSA can be used to help cover out-of-pocket medical expenses.

For 2025, once you’re enrolled in an FSA account, you can contribute up to $3,300 (an increase of $100 from the 2024 limit). If you’re married and your spouse has a plan through their employer, your spouse can also contribute up to $3,300 to that plan. This would allow you to jointly contribute up to $6,600 for your household.

An FSA debit card looks and performs like a bank debit card, but it is connected to your flexible savings account, not your checking. You can only use it to pay for qualified medical and dental expenses not covered by your health insurance.

Worth noting: You may wonder what an HSA vs. FSA is. Though they sound alike, a flexible spending account works differently than a health savings account (HSA). You can only get an FSA through an employer; freelancers and self-employed individuals are not eligible. Also, HSAs are only available to those who are enrolled in a high deductible health plan, or HDHP.

Recommended: Benefits of Health Savings Accounts

Ways That You Can Use an FSA Debit Card

There are quite a few FSA rules and regulations dictating what you can spend your untaxed funds on.

The list of FSA-eligible expenses is extensive, covering everything from co-pays to bandages. Here are just some of the things you may be able to use your FSA debit card for:

•   Medical copays and deductibles

•   Prescription medications

•   Approved over-the-counter drugs, such as allergy, cough, and pain medications

•   Testing kits, including those for COVID-19 and cholesterol

•   Crutches, canes, and walkers

•   Dental expenses, including crowns and dentures

•   Vision expenses, including glasses and contact lenses

•   Fertility treatments

•   Hospital and ambulance fees

•   Lab fees

•   Acupuncture, chiropractic treatments, and massage therapy.

Ways That You Cannot Use an FSA Debit Card

An FSA debit card can be a convenient way to pay for medical fees, prescriptions, and other health-related items your health insurance doesn’t cover. But not all wellness-related expenses are covered. Here are some things you cannot use an FSA card for, including:

•   Groceries. Although diet is an important part of a healthy lifestyle, your FSA card won’t pay for, say, organic beef and green beans.

•   Cosmetic procedures. Expenses for electrolysis, face lifts, hair transplants, and the like are typically not covered.

•   Dining out. You can’t use an FSA debit card at a restaurant, even if it’s a vegan or “health food” eatery

•   Vitamins and nutritional supplements, unless you can prove they were prescribed by a physician

•   Getting cash. Unlike with a debit card, you will not be able to use an FSA card to withdraw cash funds from your account.

Recommended: Guide to Practicing Financial Self-Care

Process of Getting an FSA Debit Card

The steps to getting an FSA debit card are pretty straightforward:

•   Sign up for an FSA account offered by your employer. There is typically an “open season,” a window of time during the year when you are eligible to enroll.

•   Make a contribution or set up a contribution commitment for the account. These accounts are typically pre-funded, by the way, which is a nice perk. What that means: If you enroll in an FSA on January 1st and pledge to contribute $2,400 over the year, paying $200 a month, the $2,400 becomes available for you to use right away.

•   Wait for your FSA debit card. Once you enroll and contribute to your FSA account, the debit will be sent to your address. This can take 7 to 10 business days.

Recommended: HSA vs. HRA: What’s the Difference?

Pros and Cons of FSA Debit Cards

If you are someone who anticipates having frequent out-of-pocket healthcare expenses, a flexible spending account and an FSA debit card can be convenient. It can be a good way for you to save pre-tax dollars and put them toward those expenditures.

However, it’s worthwhile to consider both the upsides and downsides to having an FSA debit card:

Pros of having an FSA account and debit card

•   Easy access to tax-free funds to spend on qualifying medical expenses. You can use the FSA card like a debit card to make payments.

•   Online shopping. You can use your FSA debit card for online shopping, as long as it’s with a vendor that accepts the FSA card. Amazon, CVS, and other online shopping sites identify which items are FSA eligible, making shopping even simpler.

•   Avoiding pesky paperwork. Using the FSA debit card means you don’t have to keep track of receipts and file a reimbursement report with your employer.

•   No cash out-of-pocket. With an FSA debit card, you’ll avoid a trip to the ATM or having to use your personal debit card, and you won’t have to wait for a reimbursement. What’s more, you can avoid using a credit card for some health-related expenses, thereby possibly avoiding hefty interest charges, too.

Cons of having an FSA debit card

Here are some potential downsides to using an FSA debit card:

•   Contributions are use-it-or-lose-it. In many cases, if you don’t use your FSA funds by the end of the year, you will forfeit the remaining balance. Some employers may allow for a grace period to spend the money or for certain amounts to be rolled over. But this aspect is probably the biggest drawback of having an FSA account and debit card.

•   If you leave, the money stays. Usually, if you quit or change jobs, the money you contributed to your FSA stays with your employer.

•   No reward perks. You won’t get any bonus miles or other award points from swiping an FSA debit card.

Recommended: Beginner’s Guide to Health Insurance

FSA Debit Card vs Traditional Debit Card

An FSA debit card and personal debit card from your bank or credit union share a number of features. Both provide access to funds for in-person purchases, and you should have no issues using a debit card online nor an FSA debit card.

But there are some distinct differences between an FSA debit card and traditional debit card, including:

FSA Debit Card Traditional Debit Card
FSA debit cards can only be used to purchase qualifying medical expenses Debit cards from a bank can be used to purchase just about anything
With an FSA debit card, it’s a good idea to keep the receipts from your purchases, in case you need them for your employer or the IRS Debit card purchases are personal, and typically don’t require reporting to the IRS
Account funds attached to an FSA debit card can expire at the end of the year There’s no time limit for spending your own personal account money
FSA debit card purchases don’t usually come with any reward perks or bonus points With some debit cards, you can build up reward points and bonus miles with every purchase
You can only use FSA debit cards at stores and medical locations that accept them You can use your debit card at almost any store, venue, or medical facility that accepts card payments
You cannot get cash with your FSA card You can get cash with your traditional debit card, whether at an ATM or other location

Recommended: What Is a Debit Card?

The Takeaway

Using an FSA debit card can be a hassle-free way to pay for qualifying, out-of-pocket medical expenses. These cards function much like a traditional debit card, helping you pay for health-related items with the pre-tax dollars that are in your account. However, if you have one of these cards, it’s wise to know the pros and cons so you can use it most effectively.

3 Money Tips

1.    If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.

2.    If you’re creating a budget, try the 50/30/20 budget rule. Allocate 50% of your after-tax income to the “needs” of life, like living expenses and debt. Spend 30% on wants, and then save the remaining 20% towards saving for your long-term goals.

3.    When you overdraft your checking account, you’ll likely pay a non-sufficient fund fee of, say, $35. Look into linking a savings account to your checking account as a backup to avoid that, or shop around for a bank that doesn’t charge you for overdrafting.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

FAQ

Can you be denied an FSA debit card?

If you qualify for an FSA account through your employer and the account comes with an FSA debit card, there’s little chance you would be denied one, unless you have missed the deadline for the enrollment period.

Is it good to have an FSA debit card and a traditional debit card?

It’s wise to have an FSA debit card and a traditional debit card. You can only use an FSA debit card to pay for qualifying medical expenses at vendors who will accept it.. You will likely need a standard debit card to pay for groceries, clothes, and life’s other expenses.

Can I withdraw cash with an FSA debit card?

Unlike with a traditional debit card, you cannot withdraw cash with an FSA debit card.

Does a bank provide an FSA debit card?

An FSA debit card is not provided by a bank, but rather through a vetted healthcare FSA vendor chosen by your employer.

Photo credit: iStock/praetorianphoto

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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.

SoFi members with direct deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. 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 (“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, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 3.80% 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 members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

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 3.80% 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.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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.

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2025
How to Pay Your Taxes With a Credit Card

Can You Pay Taxes With a Credit Card?

By | Credit, Family Finances, money | Comments Off on Can You Pay Taxes With a Credit Card?

In many cases, you can pay your taxes with a credit card. Whether you want to pay the IRS with a credit card so that you can earn rewards or have a bit of financial breathing room, it’s important to be aware of the implications of using such a payment method, such as fees and interest you may pay. Read on to learn more about how to pay taxes with a credit card.

Key Points

•   Paying taxes with a credit card is often possible.

•   Paying taxes with a credit card can earn rewards like cash back, miles, or points.

•   Third-party processing fees for credit card tax payments can cost a couple or a few percentage points of the balance due.

•   Using a 0% APR credit card allows spreading tax payments interest-free.

•   High interest charges can apply if the tax balance is not paid off promptly.

Can You Pay Federal Taxes With a Credit Card?

Yes, you can. More specifically, you can pay your federal taxes with a credit card (and in some cases, you may even be able to pay your state taxes with one as well). The IRS offers different third-party payment processors that accept credit card payments for taxes.

Keep in mind that if you pay the IRS with a credit card, this type of transaction isn’t free, given how credit cards work. Whichever third-party payment service provider you choose, you’ll be charged additional processing fees for the convenience of using your credit card to pay taxes. For example, all of the third-party options charge a percentage of the amount you’ll be paying in taxes, but there’s also a minimum flat fee you’ll owe.

In addition, there may be limitations on how many times you can use your credit card for IRS payments. For instance, if you wanted to pay your personal income taxes, you can only do so twice per year for the current tax year due. However, if you worked out a monthly payment plan with the IRS, you can pay with a credit card up to two times per month.

What to Know Before Paying Taxes With a Credit Card

Before pulling out your credit card to pay your taxes, it’s important to know what your goals are. Here are some common reasons taxpayers choose to pay their taxes with a credit card:

•   You may earn rewards points, cash back, or miles. Many consumers love to earn perks offered by their credit card issuers and see it as a major benefit of what a credit card is. Even with the additional fees associated with paying taxes with a credit card, you may feel like the rewards offset what you’ll pay. In other words, if the value of the rewards is much higher than the service fees, it might be worth using your card. As an example, say you’ll be able to earn 4,000 rewards points from your tax payment, which equates to $100 toward a flight or hotel room. If you owe $3,000 in federal taxes and the third-party payment service charges a 2% fee, you’re effectively paying $60 in fees to earn $100 in rewards. Whether that’s worth it is up to you.

•   It’s possible to earn a major rewards bonus. If you signed up for a new rewards credit card and need to meet a minimum spending threshold to earn a huge bonus, it might be worth considering paying your taxes with that credit card. For instance, if you signed up for a credit card offering 50,000 bonus miles — an equivalent to $1,000 worth of travel — paying a $4,000 tax bill with a payment service charge of 2% equates to $80 in fees. Assuming that meets your minimum spending threshold, the value you receive is pretty high. Just make sure you can make more than your credit card minimum payment, and ideally your full balance, to avoid interest accruing.

•   You’ll gain the ability to spread out your payment. Paying taxes with a credit card might be worth considering if you’re looking for a low-cost way to spread out your tax payments. If you have excellent credit, you may qualify for a credit card offering a 0% introductory annual percentage rate (APR), meaning you’ll have time until the offer runs out to pay off your taxes interest-free. Sure, you’re paying card processing service fees, but that could be worth it to spread out your payments. However, many credit card companies have terms and conditions that stipulate how you can remain in good standing for the introductory offer for the APR on a credit card — make sure you’re following them, or you could end up paying a high amount in interest.

What Is the Fee for Paying Taxes With a Credit Card?

As mentioned, the amount of the fee you’ll owe for paying taxes with a credit card will vary depending on which payment processor you use. Here’s a look at how much each processor’s fees run:

Payment Processor

 Fee Rate

 Minimum Fee
Pay1040 2.89% $2.50
ACI Payments, Inc. 1.85% $2.50

Pros and Cons of Paying Taxes With a Credit Card

There are advantages and disadvantages to paying the IRS with a credit card. Here’s an overview of the pros and cons, which will be covered in more detail below:

Pros of Paying Taxes With a Credit Card

 Cons of Paying Taxes With a Credit Card
Earn cash back and credit card rewards Third-party payment processors charge fees
Meet spending thresholds for bonus rewards earnings Rewards earnings may not offset fees paid
Use a convenient form of payment Potentially pay high credit card interest rates if you carry a balance or the introductory APR period ends before your balance is paid off
Spread out payments interest-free if using a card with 0% introductory APR IRS payment plan interest rates may be lower than what’s offered by credit cards

Pros of Paying Taxes With a Credit Card

There are the major upsides of paying the IRS with a credit card, including:

•   You can earn cash back and credit card rewards. By putting the amount of your tax bill on your credit card, you might earn some credit card rewards. Just make sure your rewards earnings will offset any fees you’ll pay (though rest assured, taxable credit card rewards usually aren’t a thing, except in certain cases).

•   It can help you meet spending thresholds to earn bonus rewards. Often, credit cards that offer bonuses require you to spend a certain amount within a specified period of time in order to earn them. If you’re struggling to reach that threshold, paying your taxes with your credit card could help, allowing you to snag those bonus rewards.

•   It’s a convenient form of payment. Anyone who has paid with a credit card knows it’s easy. You don’t have to fill in various bank account numbers like you otherwise would if you opt to cover your tax bill with a credit card.

•   You can spread out payments — and interest-free, if you have a 0% APR card. If you’re tight on cash or simply want to spread out your tax payment, a credit card can enable you to do so. Even better, if you have a card that offers 0% APR, you’ll avoid paying any interest while you space out your payments.

Cons of Paying Taxes With a Credit Card

It’s not all upsides when it comes to paying taxes with a credit card. Make sure to consider these drawbacks as well:

•   You’ll pay third-party processing fees. Perhaps the biggest drawback of paying the IRS with a credit card is you’ll pay fees. The exact amount you pay in fees will vary depending on which third-party payment processor you use, but they can range up to almost 3%. If your tax bill is $1,000, for example, you could pay up to almost $30 in fees.

•   The rewards you earn might not offset the fees. If your rewards rate is close to the amount in fees, those two will effectively cancel each other out. In other words, you’ll pretty much break even if you pay roughly the same amount in fees as you earn in credit card rewards, which might not make using a credit card worthwhile.

•   You could end up paying interest at a steep rate. If you aren’t able to pay off your balance in full by the statement due date, or if for some reason you don’t pay off your full balance by the time your 0% APR intro offer ends, interest charges will start racking up. Plus, credit card interest rates tend to be pretty high compared to other types of loans.

•   There might be lower interest rate payment plans available. If you’re hoping to spread out your payments, using a credit card might not be your most cost-efficient option. The IRS offers a payment plan for those who qualify, and the interest rate can be lower than the APR on a credit card.

Recommended: Understanding Purchase Interest Charges on Credit Cards

How Do You Pay Taxes With a Credit Card?

If you’ve decided you want to use your credit card for tax payments, here’s how you do it.

1. Decide Which Credit Card to Use

Consider your reasons for using a credit card — is it to earn rewards, meet a minimum spending threshold, or spread out your payments interest-free? Whatever it is, make sure to choose a card that meets your goals. If you want to open a credit card, then you’ll want to make sure you receive the card in time to pay the IRS before the tax filing deadline.

Recommended: When Are Credit Card Payments Due?

2. Determine the Amount You Want to Pay

Whatever the amount is, ensure it’s well within your credit card limit. You can spread your payments over multiple credit cards, but keep in mind the transaction limits that the IRS imposes for certain payments.

3. Choose a Third-Party Payment Processor

The IRS website currently lists three approved payment service providers that you can use. Compare which one offers the best features and lowest fees for your situation.

4. Make Your Payment

Once you’ve selected which payment service provider you want to go with, head to their website and follow the instructions. You may be asked to provide information such as the credit card expiration date and CVV number on a credit card. Double check that you’re making the right type of payment and that all the information you’ve entered is accurate before pressing submit.

Recommended: When Are Credit Card Payments Due?

Other Ways to Cover Your Tax Bill

If you’re not convinced the costs involved in credit card payment are worth it, there are other ways that you can pay your taxes.

Direct Pay With Bank Account

While this option won’t allow you to earn rewards or spread out your payments, you’ll also steer clear of paying any fees or potentially owing interest. To make a tax payment directly from your bank account, you’ll simply need to select this option and provide the requested banking information, such as your bank account and routing numbers.

IRS Payment Plan

If you’re hoping to be able to pay off your balance over time, you can apply for a payment plan with the IRS. You may qualify for a short-term payment plan if you owe less than $100,000 in combined tax, penalties or interest, or you could get a long-term payment plan if you owe $50,000 or less in combined tax, penalties, and interest and have filed all required returns.

Note that this option may involve fees and interest though. The costs involved will depend on which type of plan you’re approved for.

Recommended: Tips for Using a Credit Card Responsibly

The Takeaway

You can pay taxes with a credit card. Paying taxes using a rewards credit card is a great way to earn perks, helping you maximize your spending. However, there are downsides to consider as well, such as the third-party processing fees and the potential to run into high credit card interest if you don’t have a good APR for a credit card.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

What does it cost to pay taxes with a credit card?

Third-party payment processors charge a service fee to pay your taxes with a credit card. In many cases, it’s typically a percentage of your payment amount, with a minimum flat fee charged.

Does paying taxes with your credit card earn you rewards?

Paying taxes can earn you rewards, depending on the type of credit card you use. Many rewards credit cards offer cash back, miles, or travel points on qualifying purchases. Before doing so, it might be helpful to determine whether the value of the rewards earned will outweigh the fees you’ll pay.

Is it better to pay taxes with a credit card or debit card?

Both methods of paying your taxes can be a great choice, depending on your financial situation. If you’re not interested in earning rewards or spreading out your payments and have the cash on hand, you can pay with a debit card. Some may prefer to pay with a credit card because they feel it’s a more secure way to make payments.

Are credit cards the cheapest way to pay your tax bill?

No. Paying your taxes with a credit card will add an additional fee onto your tax bill, plus you could end up paying interest if you don’t pay off your full statement balance by the due date. Other options, such as direct pay with your bank account don’t involve paying fees or interest.

Can you pay state taxes with a credit card?

It depends. Some states do facilitate tax payments with a credit card. To find out if yours does, check your state’s tax website for more information.

Can you pay property taxes with a credit card?

Once again, it depends which state you live in. Many counties and cities will allow you to pay property taxes with a credit card, though not all do. Reach out to your local tax collector’s office to see which payment options are accepted.

Photo credit: iStock/Moyo Studio

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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.

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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Jan
14
2025

Health Care Costs in Retirement: How to Plan Ahead

By | Budgeting & Goals, invest, Investing, Preparing for Retirement | Comments Off on Health Care Costs in Retirement: How to Plan Ahead

When planning for retirement, people often assume Medicare will cover their medical bills, but in fact many retirees will face out-of-pocket costs that, over time, could reach into the six figures.

While it’s difficult to predict for sure what your actual health care costs in retirement will be — especially in light of today’s longevity — it’s wise to work with a ballpark figure in order to create a safety net of savings that will cover you, no matter what your needs will be in the years to come.

Key Points

•   Planning for retirement should take health care costs into account, such as potential out-of-pocket costs and long-term care.

•   According to research, the average 65-year-old individual may need $165,000 in savings to cover medical expenses in retirement (and double that amount for couples).

•   Medicare covers medical costs such as preventive care, doctor visits, prescription drugs, inpatient hospital stays, short-term rehab, and hospice.

•   Medicare Advantage Plans are Medicare-approved, private insurance plans that may cover medical basics as well as other expenses, such as vision, hearing, and dental.

•   Health savings accounts (HSAs) and long-term care insurance can help pay for medical expenses not covered by Medicare.

Health Care in Retirement

The cost of health care in retirement can be overwhelming. According to the annual Fidelity Retiree Health Care Cost Estimate in 2024, a typical retired couple aged 65 could spend as much as $330,000 in after-tax savings on medical expenses during the course of their retirement.

That figure doesn’t include related health costs such as dental services, over-the-counter medications, or long-term care — which are not currently covered by original Medicare.

Long-term care expenses can be especially onerous, with the median cost of a private room in a nursing home running about $116,800 per year, according to the 2023 Genworth Cost of Care Survey. This, too, is an expense that many people may need to factor into their retirement plans, given the growing number of people living into their 80s and 90s — or longer.

This “new longevity,” as it’s sometimes called, may also lead to additional health-related costs down the line that are difficult to anticipate now, but require educated estimates nonetheless — especially for women, who live on average about five years longer than men.

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How Much to Budget for Health Care Costs in Retirement

To create a realistic plan for retirement, and make optimal financial decisions about investing for retirement, insurance coverage, and the timing of important government benefits — the starting point is to look at how much money will be coming in, and how much will be going out to pay for likely health issues.

Social Security Benefits

While Social Security benefits depend on an individual’s work history, as well as the age when they first file for Social Security, the key thing to know about this source of income is that it’s limited. The average monthly payout, starting in January 2024, was $1,907. And the maximum possible benefit amount is $3,822 per month, for those who retire at full retirement age in 2024, and the maximum possible benefit is $4,018 per month for those who retire at full retirement age in 2025.

Individuals can file for Social Security starting at age 62, generally speaking, but “full retirement age” is 67 for those born in 1960 and later. To get a more accurate estimate of your own benefit amount, go to SSA.gov.

Private Sources of Income

Fortunately, most retirees also have savings or a pension, which can add to their income. Nearly 80% of retirees reported having one or more sources of private income, in addition to Social Security, according to the Economic Well-Being of U.S. Households in 2022, by the Federal Reserve Board.

For example, you may have opened a retirement account like an IRA or an employer-sponsored plan, such as a 401(k), that may offer an additional source of income.

If you’re freelance or a small business owner, you may have a SEP IRA or a SIMPLE IRA — common retirement plan options for the self-employed.

The point is to have a grasp of your income sources in retirement, as well as your anticipated cash flow, so that you can cover medical costs in retirement.

Understanding Health Care Costs

As costs vary considerably depending on one’s region, age, and overall health, it can be difficult to estimate the precise amount to set aside for health care in retirement.

Start by assessing your overall health today, and speaking to your doctor(s) about any chronic conditions, genetic predispositions, and any other risk factors that could impact the care you need as you get older.

Unfortunately, there’s almost no way to predict with any accuracy the types of conditions or care you might need, or what they will cost, when preparing for retirement. But in some cases this thought exercise may help you anticipate some upcoming costs, so you can factor that into your overall estimate.

Of course, not all of your medical costs in retirement will be out of pocket; Medicare (and Medicaid, if you qualify) cover many medical expenses. But this insurance is another expense to factor in.

What Does Medicare Cost, What Does It Cover?

Medicare is a medical insurance program offered by the federal government for those 65 years and older, and those who are disabled. Medicare will pay certain health care expenses in retirement, but with restrictions. Dental, vision, and hearing care, including hearing aids, are not covered by Original Medicare, generally known as Parts A and B.

Also, as noted above: Medicare does not cover long-term care, like an assisted living or nursing home facility.

Note that you must apply for Medicare benefits within a certain window, or risk being penalized with higher premiums. Generally, the Initial Enrollment period begins three months before you turn 65, and it ends three months after the month in which you turned 65. Some exceptions apply (for example, if you have health insurance through your employer, or were affected by a natural disaster).

Be sure to check the terms that might apply to your situation to avoid a penalty.

Understanding Medicare Coverage

The following terms generally apply to those with a modified adjusted gross income (MAGI) over $103,000, or $206,000 for a married couple. If your premium is subject to an income adjustment, it could be as high as $594 per month (though according to the Centers for Medicare and Medicaid Services (CMS), the highest rate generally applies to people with incomes over $500,000, or $750,000 for a married couple).

•   Medicare Part A covers inpatient hospital stays and treatment, as well as skilled nursing care (i.e. short-term rehab), limited in-home care and hospice. As long as you or your spouse had sufficient Medicare taxes withheld through your job (generally at least 10 years), you won’t pay a monthly premium for Part A. The deductible for Part A is $1,632 in 2024 and $1,676 in 2025.

•   Medicare Part B covers outpatient care, preventive care, and visits to doctors. The monthly premium for Part B is about $174 per month, with a roughly $240 annual deductible in 2024. In 2025, the monthly premium for Part B is $185 per month, with an annual deductible of $257.

•   Medicare Part D covers prescription drugs. The monthly premium is about $55.50 in 2024 and about $57 in 2025.

Medicare Part C, or Medicare Advantage Plans, is a bit of a separate case. Medicare Advantage plans are private insurance plans that are Medicare-approved, and may cover vision, hearing, or dental needs, as well as the medical basics and prescriptions covered by Parts A, B, and D. Medicare Advantage plans are optional.

While the Advantage Plans are designed to fill in certain gaps in coverage, you want to make sure the costs are manageable, and that you’re not paying for overlapping policies.

Medicare Costs

In other words, assuming at least one hospital stay that requires you to pay the deductible, the basic cost of Medicare alone is about $4,600 per year. Again, that doesn’t include:

•   Vision care

•   Dental care

•   Hearing care or hearing aids

•   Long-term care

Most people will need some or all of those types of health care as they get older, which could add to your potential out-of-pocket expenses over time, and speaks to the need for some emergency savings.

Other Ways to Pay for Health Care

In addition to Medicare, there are other ways to pay for medical expenses during retirement, including HSA accounts and long-term care insurance.

Health Savings Account (HSA)

When choosing a health insurance plan before you retire, consider one that comes with a health savings account (HSA) that may help you save money for retirement medical expenses. These accounts generally come with high-deductible health plans (HDHPs), and provide three substantial tax benefits:

•   Contribution deductions

•   Tax-deferred growth

•   Withdrawals without taxation for qualified medical costs

The accounts take pre-tax deposits to cover health care costs that are not covered by insurance. The unspent money in an HSA rolls over from year to year. Most important, the money in an HSA account belongs to you, even when you are no longer participating in the original high-deductible plan.

What Your HSA Savings May Cover

HSA funds can be used to pay for a variety of medical expenses in retirement. For instance, prescription drugs, eyeglasses, hearing aids, and other medical supplies can generally be purchased with HSA funds.

Additionally, you can use HSA savings to cover deductibles and co-payments for medical care. Medicare premiums and long-term care insurance premiums can also be covered using HSA funds.

By utilizing catch-up payments and employer contributions, those who are already over 50 can still get the most out of these programs. A catch-up payment of $1,000 per year, in addition to the maximum contribution limit, is allowed for people 55 and older. One can use an HSA to pay for yearly physicals or other preventative exams covered by an HDHP.

A benefit of utilizing an HSA to cover medical expenses in retirement is that the money in the account can be invested, allowing it to increase in value over time. This might be helpful for people who wish to have a dedicated source of savings to cover medical bills.

It’s worth noting that funds in an HSA must be used for qualified medical expenses in order to be withdrawn tax-free. It’s a good idea to consult a tax professional or review IRS guidelines to ensure that HSA funds are being used appropriately.

Long-Term Care Insurance

Another approach to bridge the Medicare gap is to get long-term care insurance. This kind of insurance can provide a monthly benefit for long-term care, either for a few years or for the rest of one’s life.

The expenses of long-term care such as in-home care, assisted living, and nursing facility care, can be covered in part by long-term care insurance. These services are often required by people who are unable to do activities of daily living on their own, such as eating, dressing, or bathing, due to a chronic disease or disability.

That said, these policies can be complex, as well as expensive, and it may be wise to consult with a professional before purchasing coverage.

The Takeaway

Medical expenses can be a large portion of one’s retirement budget. As daunting as it may seem, calculating these expenditures ahead of time and developing an insurance and spending plan will help you save more of your retirement funds for other needs.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


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FAQ

How much does the average person spend on health care in retirement?

Health care costs depend on a variety of factors, but on average a healthy person over age 65 could spend as much as $165,000 during their retirement ($330,000 per couple).

How do I prepare for health care expenses in retirement?

A few ways to prepare include making a retirement budget, saving in a retirement account, funding a health savings account while still employed, making sure to get adequate medical insurance through Medicare and/or private Advantage plans once you turn 65. You may want to consider long-term care insurance as well.

How do I save for out-of-pocket medical expenses?

Ways to save on out-of-pocket medical expenses include shopping around for the best prices on health care services, making use of preventive care services to help reduce the need for more expensive treatments in the future, and purchasing insurance to help cover unexpected medical costs. In addition, funding a health savings account (HSA) when it’s offered is a tax-advantaged way to set aside money for health care costs.

Photo credit: iStock/jacoblund

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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