Feb
26
2025
Should I Put My Bonus Into My 401k? Here's What You Should Consider

Should I Put My Bonus Into My 401(k)? Here’s What You Should Consider

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Should I Put My Bonus Into My 401(k)? Here’s What You Should Consider

If you received a bonus and you’re wondering what to do with the bonus money, you’re not alone. Investing your bonus money in a tax-advantaged retirement account like a 401(k) has some tangible advantages. Not only will the extra cash help your nest egg to grow, you could also see some potential tax benefits.

Of course, we live in a world of competing financial priorities. You could also pay down debt, spend the money on something you need, save for a near-term goal — or splurge! The array of choices can be exciting — but if a secure future is your top goal, it’s important to consider a 401(k) bonus deferral.

Here are a few strategies to think about before you make a move.

Key Points

•   Investing a bonus in a 401(k) can significantly enhance retirement savings and offer potential tax benefits.

•   Bonuses are subject to income tax withholding, which may reduce the expected amount.

•   Contribution limits for a 401(k) are $23,000 in 2024 and $23,500 in 2025 for those under age 50. Those aged 50 and over can make an additional catch-up contribution.

•   If 401(k) contributions are maxed out, considering an IRA or a taxable brokerage account is beneficial.

•   Allocating a bonus to a 401(k) or IRA can reduce taxable income for the year, potentially lowering the tax bill.

Receiving a Bonus Check

First, a practical reminder. When you get a bonus check, it may not be in the amount that you expected. This is because bonuses are subject to income tax withholding. Knowing how your bonus is taxed can help you understand how much you’ll end up with so you can determine what to do with the money that’s left, such as making a 401(k) bonus contribution. The IRS considers bonuses as supplemental wages rather than regular wages.

Ultimately, your employer decides how to treat tax withholding from your bonus. Employers may withhold 22% of your bonus to go toward federal income taxes. But some employers may add your whole bonus to your regular paycheck, and then tax the larger amount at normal income tax rates. If your bonus puts you in a higher tax bracket for that pay period, you may pay more than you expected in taxes.

Also, your bonus may come lumped in with your paycheck (not as a separate payout), which can be confusing.

Whatever the final amount is, or how it arrives, be sure to set aside the full amount while you weigh your options — otherwise you might be tempted to spend it.

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement by opening an IRA account. The money you save each year in a traditional IRA is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

What to Do With Bonus Money

There’s nothing wrong with spending some of your hard-earned bonus from your compensation. One rule of thumb is to set a percentage of every windfall (e.g. 10% or 20%) — whether a bonus or a birthday check — to spend, and save the rest.

To get the most out of a bonus, though, many people opt for a 401k bonus deferral and put some or all of it into their 401(k) account. The amount of your bonus you decide to put in depends on how much you’ve already contributed, and whether it makes sense from a tax perspective to make a 401(k) bonus contribution.

Contributing to a 401(k)

The contribution limit for 401(k) plans in 2024 is $23,000; for those 50 and older you can add another $7,500, for a total of $30,500. The contribution limit for 401(k) plans in 2025 is $23,500; for those 50 and older you can add another $7,500, for a total of $31,000. For 2025, those aged 60 to 63 may contribute an additional $11,250 (instead of $7,500), for a total of 34,750. If you haven’t reached the limit yet, allocating some of your bonus into your retirement plan can be a great way to boost your retirement savings.

In the case where you’ve already maxed out your 401(k) contributions, your bonus can also allow you to invest in an IRA or a non-retirement (i.e. taxable) brokerage account.

Contributing to an IRA

If you’ve maxed out your 401k contributions for the year, you may still be able to open a traditional tax-deferred IRA or a Roth IRA. It depends on your income.

In 2024, the contribution limit for traditional IRAs and Roth IRAs is $7,000; with an additional $1,000 if you’re 50 or older. In 2025, the contribution limit for traditional IRAs and Roth IRAs is also $7,000; with an additional $1,000 if you’re 50 or older.

However, if your income is $161,000 or more (for single filers) or $240,000 or more (for married filing jointly) in 2024, you aren’t eligible to contribute to a Roth. For 2025, you can’t contribute to a Roth if your income is $165,000 or more (for single filers) or $246,000 or more (for married filing jointly). And while a traditional IRA doesn’t have income limits, the picture changes if you’re covered by a workplace plan like a 401(k).

If you’re covered by a workplace retirement plan and your income is too high for a Roth, you likely wouldn’t be eligible to open a traditional, tax-deductible IRA either. You could however open a nondeductible IRA. To understand the difference, you may want to consult with a professional.

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Contributing to a Taxable Account

Of course, when you’re weighing what to do with bonus money, you don’t want to leave out this important option: Opening a taxable account.

While employer-sponsored retirement accounts typically have some restrictions on what you can invest in, taxable brokerage accounts allow you to invest in a wider range of investments.

So if your 401(k) is maxed out, and an IRA isn’t an option for you, you can use your bonus to invest in stocks, bonds, exchange-traded funds (ETFs), mutual funds, and more in a taxable account.

Deferred Compensation

You also may be able to save some of your bonus from taxes by deferring compensation. This is when an employee’s compensation is withheld for distribution at a later date in order to provide future tax benefits.

In this scenario, you could set aside some of your compensation or bonus to be paid in the future. When you defer income, you still need to pay taxes later, at the time you receive your deferred income.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Your Bonus and 401(k) Tax Breaks

Wondering what to do with a bonus? It’s a smart question to ask. In order to maximize the value of your bonus, you want to make sure you reduce your taxes where you can.

One method that’s frequently used to reduce income taxes on a bonus is adding some of it into a tax-deferred retirement account like a 401(k) or traditional IRA. The amount of money you put into these accounts typically reduces your taxable income in the year that you deposit it.

Here’s how it works. The amount you contribute to a 401(k) or traditional IRA is tax deductible, meaning you can deduct the amount you save from your taxable income, often lowering your tax bill. (The same is not true for a Roth IRA or a Roth 401(k), where you make contributions on an after-tax basis.)

The annual contribution limits for each of these retirement accounts noted above may vary from year to year. Depending on the size of your bonus and how much you’ve already contributed to your retirement account for a particular year, you may be able to either put some or all of your bonus in a tax-deferred retirement account.

It’s important to keep track of how much you have already contributed to your retirement accounts because you don’t want to put in too much of your bonus and exceed the contribution limit. In the case where you have reached the contribution limit, you can put some of your bonus into other tax deferred accounts including a traditional IRA or a Roth IRA.

Recommended: Important Retirement Contribution Limits

How Investing Your Bonus Can Help Over Time

Investing your bonus may help increase its value over the long-run. As your money potentially grows in value over time, it can be used in many ways: You can stow part of it away for retirement, as an emergency fund, a down payment for a home, to pay outstanding debts, or another financial goal.

While it can be helpful to have some of your bonus in cash, your money is typically better in a savings or investment account where it has the potential to work for you. If you start investing your bonus each year in either a tax-deferred retirement account or non-retirement account, this could help you save for the future.

Test your understanding of what you just read.

Investing for Retirement With SoFi

The yearly question of what to do with a bonus is a common one. Just having that windfall allows for many financial opportunities, such as saving for immediate needs — or purchasing things you need now. But it may be wisest to use your bonus to boost your retirement nest egg — for the simple reason that you may stand to gain more financially down the road, while also potentially enjoying tax benefits in the present.

The fact is, most people don’t max out their 401(k) contributions each year, so if you’re in that boat it might make sense to take some or all of your bonus and max it out. If you have maxed out your 401(k), you still have options to save for the future via traditional or Roth IRAs, deferred compensation, or investing in a taxable account.

Keeping in mind the tax implications of where you invest can also help you allocate this extra money where it fits best with your plan.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

FAQ

Is it good to put your bonus into a 401(k)?

The short answer is yes. It might be wise to put some or all of your bonus in your 401(k), depending on how much you’ve contributed to your workplace account already. You want to make sure you don’t exceed the 401(k) contribution limit.

How can I avoid paying tax on my bonus?

Your bonus will be taxed, but you can lower the amount of your taxable income by depositing some or all of it in a tax-deferred retirement account such as a 401(k) or IRA. However, this does not mean you will avoid paying taxes completely. Once you withdraw the money from these accounts in retirement, it will be subject to ordinary income tax.

Can I put all of my bonus into a 401(k)?

Possibly. You can put all of your bonus in your 401(k) if you haven’t reached the contribution limit for that particular year, and if you won’t surpass it by adding all of your bonus. For 2024, the contribution limit for a 401(k) is $23,000 if you’re younger than 50 years old; those 50 and over can contribute an additional $7,500 for a total of $30,500. In 2025, the contribution limit for a 401(k) is $23,500 if you’re under age 50, and those 50 and up can contribute an additional $7,500 for a total of $31,000. For 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

Photo credit: iStock/Tempura


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.

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.

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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.
SOIN0124066

Read more
Feb
25
2025

Guide to Maxing Out Your 401(k)

By | Budgeting & Goals, Growing Wealth, invest, Investing | No Comments

Maxing out your 401(k) involves contributing the maximum allowable to your workplace retirement account to increase the benefit of compounding and appreciating assets over time.

All retirement plans come with contribution caps, and when you hit that limit it means you’ve maxed out that particular account.

There are a lot of things to consider when figuring out how to max out your 401(k) account. And if you’re a step ahead, you may also wonder what to do after you max out your 401(k).

Key Points

•   Maxing out your 401(k) contributions can help you save more for retirement and take advantage of tax benefits.

•   If you want to max out your 401(k), strategies include contributing enough to get the full employer match, increasing contributions over time, utilizing catch-up contributions if eligible, automating contributions, and adjusting your budget to help free up funds for additional 401(k) contributions.

•   Diversifying your investments within your 401(k) and regularly reviewing and rebalancing your portfolio can optimize your returns.

•   Seeking professional advice and staying informed about changes in contribution limits and regulations can help you make the most of your 401(k).

What Exactly Does It Mean to ‘Max Out Your 401(k)?’

Maxing out your 401(k) means that you contribute the maximum amount allowed by law in a given year, as specified by the established 401(k) contribution limits. But it can also mean that you’re maxing out your contributions up to an employer’s percentage match, too.

If you want to max out your 401(k) in 2024, you’ll need to contribute $23,000. If you’re 50 or older, you can contribute an additional $7,500, for an annual total of $30,500. If you want to max out your 401(k) in 2025, you’ll need to contribute $23,500. If you’re 50 or older, you can contribute an additional $7,500, for an annual total of $31,000. In addition, in 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0, for an annual total of $34,750.

Should You Max Out Your 401(k)?

4 Goals to Meet Before Maxing Out Your 401(k)

Generally speaking, yes, it’s a good thing to max out your 401(k) so long as you’re not sacrificing your overall financial stability to do it. Saving for retirement is important, which is why many financial experts would likely suggest maxing out any employer match contributions first.

But while you may want to take full advantage of any tax and employer benefits that come with your 401(k), you also want to consider any other financial goals and obligations you have before maxing out your 401(k).

That doesn’t mean you should put other goals first, and not contribute to your retirement plan at all. That’s not wise. Maintaining a baseline contribution rate for your future is crucial, even as you continue to save for shorter-term aims or put money toward debt repayment.

Other goals could include:

•   Is all high-interest debt paid off? High-interest debt like credit card debt should be paid off first, so it doesn’t accrue additional interest and fees.

•   Do you have an emergency fund? Life can throw curveballs—it’s smart to be prepared for job loss or other emergency expenses.

•   Is there enough money in your budget for other expenses? You should have plenty of funds to ensure you can pay for additional bills, like student loans, health insurance, and rent.

•   Are there other big-ticket expenses to save for? If you’re saving for a large purchase, such as a home or going back to school, you may want to put extra money toward this saving goal rather than completely maxing out your 401(k), at least for the time being.

Once you can comfortably say that you’re meeting your spending and savings goals, it might be time to explore maxing out your 401(k). There are many reasons to do so — it’s a way to take advantage of tax-deferred savings, employer matching (often referred to as “free money”), and it’s a relatively easy and automatic way to invest and save, since the money gets deducted from your paycheck once you’ve set up your contribution amount.

How to Max Out Your 401(k)

Only a relatively small percentage of people actually do max out their 401(k)s, however. Here are some strategies for how to max out your 401(k).

1. Max Out 401(k) Employer Contributions

Your employer may offer matching contributions, and if so, there are typically rules you will need to follow to take advantage of their match.

An employer may require a minimum contribution from you before they’ll match it, or they might match only up to a certain amount. They might even stipulate a combination of those two requirements. Each company will have its own rules for matching contributions, so review your company’s policy for specifics.

For example, suppose your employer will match your contribution up to 3%. So, if you contribute 3% to your 401(k), your employer will contribute 3% as well. Therefore, instead of only saving 3% of your salary, you’re now saving 6%. With the employer match, your contribution just doubled. Note that employer contributions can range from nothing at all to upwards of 15%. It depends.

Since saving for retirement is one of the best investments you can make, it’s wise to take advantage of your employer’s match. Every penny helps when saving for retirement, and you don’t want to miss out on this “free money” from your employer.

If you’re not already maxing out the matching contribution and wish to, you can speak with your employer (or HR department, or plan administrator) to increase your contribution amount, you may be able to do it yourself online.

2. Max Out Salary-Deferred Contributions

While it’s smart to make sure you’re not leaving free money on the table, maxing out your employer match on a 401(k) is only part of the equation.

In order to make sure you’re setting aside an adequate amount for retirement, consider contributing as much as your budget will allow. Again, individuals younger than age 50 can contribute up to $23,000 in salary deferrals in 2024 and up to $23,500 in 2025, while those 50 and over can contribute more in catch-up contributions.

It’s called a “salary deferral” because you aren’t losing any of the money you earn; you’re putting it in the 401(k) account and deferring it until later in life.

Those contributions aren’t just an investment in your future lifestyle in retirement. Because they are made with pre-tax dollars, they lower your taxable income for the year in which you contribute. For some, the immediate tax benefit is as appealing as the future savings benefit.

3. Take Advantage of Catch-Up Contributions

As mentioned, 401(k) catch-up contributions allow investors aged 50 and over to increase their retirement savings — which is especially helpful if they’re behind in reaching their retirement goals.

Individuals 50 and over can contribute an additional $7,500 for a total of $30,500 in 2024, and can contribute an additional $7,500 for a total of $31,000 in 2025. And again, in 2025, those aged 60 to 63 can contribute an additional $11,250, instead of $7,500, for a total of $34,750. Putting all of that money toward retirement savings can help you truly max out your 401(k).

As you draw closer to retirement, catch-up contributions can make a difference, especially as you start to calculate when you can retire. Whether you have been saving your entire career or just started, this benefit is available to everyone who qualifies.

And of course, this extra contribution will lower taxable income even more than regular contributions. Although using catch-up contributions may not push everyone to a lower tax bracket, it will certainly minimize the tax burden during the next filing season.

4. Reset Your Automatic 401(k) Contributions

When was the last time you reviewed your 401(k)? It may be time to check in and make sure your retirement savings goals are still on track. Is the amount you originally set to contribute each paycheck still the correct amount to help you reach those goals?

With the increase in contribution limits most years, it may be worth reviewing your budget to see if you can up your contribution amount to max out your 401(k). If you don’t have automatic payroll contributions set up, you could set them up.

It’s generally easier to save money when it’s automatically deducted; a person is less likely to spend the cash (or miss it) when it never hits their checking account in the first place.

If you’re able to max out the full 401(k) limit, but fear the sting of a large decrease in take-home pay, consider a gradual, annual increase such as 1% — how often you increase it will depend on your plan rules as well as your budget.

5. Put Bonus Money Toward Retirement

Unless your employer allows you to make a change, your 401(k) contribution will likely be deducted from any bonus you might receive at work. Many employers allow you to determine a certain percentage of your bonus check to contribute to your 401(k).

Consider possibly redirecting a large portion of a bonus to 401k contributions, or into another retirement account, like an individual retirement account (IRA). Because this money might not have been expected, you won’t miss it if you contribute most of it toward your retirement.

You could also do the same thing with a raise. If your employer gives you a raise, consider putting it directly toward your 401(k). Putting this money directly toward your retirement can help you inch closer to maxing out your 401(k) contributions.

6. Maximize Your 401(k) Returns and Fees

Many people may not know what they’re paying in investment fees or management fees for their 401(k) plans. By some estimates, the average fees for 401(k) plans are between 1% and 2%, but some plans can have up to 3.5%.

Fees add up — even if your employer is paying the fees now, you’ll have to pay them if you leave the job and keep the 401(k).

Essentially, if an investor has $100,000 in a 401(k) and pays $1,000 or 1% (or more) in fees per year, the fees could add up to thousands of dollars over time. Any fees you have to pay can chip away at your retirement savings and reduce your returns.

It’s important to ensure you’re getting the most for your money in order to maximize your retirement savings. If you are currently working for the company, you could discuss high fees with your HR team. One of the easiest ways to lower your costs is to find more affordable investment options. Typically, the biggest bargains can be index funds, which often charge lower fees than other investments.

If your employer’s plan offers an assortment of low-cost index funds or institutional funds, you can invest in these funds to build a diversified portfolio.

If you have a 401(k) account from a previous employer, you might consider moving your old 401(k) into a lower-fee plan. It’s also worth examining what kind of funds you’re invested in and if it’s meeting your financial goals and risk tolerance.

What Happens If You Contribute Too Much to Your 401(k)?

After you’ve maxed out your 401(k) for the year — meaning you’ve hit the contribution limit corresponding to your age range — then you’ll need to stop making contributions or risk paying additional taxes on your overcontributions.

In the event that you do make an overcontribution, you’ll need to take some additional steps such as letting your plan manager or administrator know, and perhaps withdrawing the excess amount. If you leave the excess in the account, it’ll be taxed twice — once when it was contributed initially, and again when you take it out.

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

What to Do After Maxing Out a 401(k)?

If you max out your 401(k) this year, pat yourself on the back. Maxing out your 401(k) is a financial accomplishment. But now you might be wondering, what’s next? Here are some additional retirement savings options to consider if you have already maxed out your 401(k).

Open an IRA

An individual retirement account (IRA) can be a good complement to your employer’s retirement plans. With a traditional IRA, you can contribute pre-tax dollars up to the annual limit, which is $7,000 in 2024 and in 2025. If you’re 50 or older, you can contribute an extra $1,000, for an annual total of $8,000 in 2024 and 2025.

You may also choose to consider a Roth IRA. As with a traditional IRA, the annual contribution limit for a Roth IRA in 2024 and 2025 is $7,000, and $8,000 for those 50 or older. Roth IRA accounts have income limits, but if you’re eligible, you can contribute with after-tax dollars, which means you won’t have to pay taxes on earnings withdrawals in retirement as you do with traditional IRAs.

You can open an IRA at a brokerage, mutual fund company, or other financial institution. If you ever leave your job, you can typically roll your employer’s 401(k) into your IRA without facing tax consequences as long as both accounts are similarly taxed, such as rolling funds from a traditional 401(k) to a traditional IRA, and funds are transferred directly from one plan to the other. Doing a rollover may allow you to invest in a broader range of investments with lower fees.

Boost an Emergency Fund

Experts often advise establishing an emergency fund with at least six months of living expenses before contributing to a retirement savings plan. Perhaps you’ve already done that — but haven’t updated that account in a while. As your living expenses increase, it’s a good idea to make sure your emergency fund grows, too. This will cover you financially in case of life’s little curveballs: new brake pads, a new roof, or unforeseen medical expenses.

The money in an emergency fund should be accessible at a moment’s notice, which means it needs to comprise liquid assets such as cash. You’ll also want to make sure the account is FDIC insured, so that your money is protected if something happens to the bank or financial institution.

Save for Health Care Costs

Contributing to a health savings account (HSA) can reduce out-of-pocket costs for expected and unexpected health care expenses, though you can only open and contribute to an HSA if you are enrolled in a high-deductible health plan (HDHP).

For tax year 2024, those eligible can contribute up to $4,150 pre-tax dollars for an individual plan or up to $8,300 for a family plan. For tax year 2025, those eligible can contribute up to $4,300 pre-tax dollars for an individual plan or up to $8,550 for a family plan. For 2024 and 2025, those 55 or older can make an additional catch-up contribution of $1,000 per year.

The money in this account can be used for qualified out-of-pocket medical expenses such as copays for doctor visits and prescriptions. Another option is to leave the money in the account and let it grow for retirement. Once you reach age 65, you can take out money from your HSA without a penalty for any purpose. However, to be exempt from taxes, the money must be used for a qualified medical expense. Any other reasons for withdrawing the funds will be subject to regular income taxes.

Increase College Savings

If you’re feeling good about maxing out your 401(k), consider increasing contributions to your child’s 529 college savings plan (a tax-advantaged account meant specifically for education costs, sponsored by states and educational institutions).

College costs continue to creep up every year. Helping your children pay for college helps minimize the burden of college expenses, so they hopefully don’t have to take on many student loans.

Open a Brokerage Account

After you max out your 401(k), you may also consider opening a brokerage account. Brokerage firms offer various types of investment account brokerage accounts, each with different services and fees. A full-service brokerage firm may provide different financial services, which include allowing you to trade securities.

Many brokerage firms require you to have a certain amount of cash to open their accounts and have enough funds to account for trading fees and commissions. While there are no limits on how much you can contribute to the account, earned dividends are taxable in the year they are received. Therefore, if you earn a profit or sell an asset, you must pay a capital gains tax. On the other hand, if you sell a stock at a loss, that becomes a capital loss. This means that the transaction may yield a tax break by lowering your taxable income.

Pros and Cons of Maxing Out Your 401(k)

thumb_up

Pros:

•   Increased Savings and Growth: Your retirement savings account will be bigger, which can lead to more growth over time.

•   Simplified Saving and Investing: Can also make your saving and investing relatively easy, as long as you’re taking a no-lift approach to setting your money aside thanks to automatic contributions.

thumb_down

Cons:

•   Affordability: Maxing out a 401(k) may not be financially feasible for everyone. May be challenging due to existing debt or other savings goals.

•   Opportunity Costs: Money invested in retirement plans could be used for other purposes. During strong stock market years, non-retirement investments may offer more immediate access to funds.

Test your understanding of what you just read.

The Takeaway

Maxing out your 401(k) involves matching your employer’s maximum contribution match, and also, contributing as much as legally allowed to your retirement plan in a given year. If you have the flexibility in your budget to do so, maxing out a 401(k) can be an effective way to build retirement savings.

And once you max out your 401(k)? There are other smart ways to direct your money. You can open an IRA, contribute more to an HSA, or to a child’s 529 plan. If you’re looking to roll over an old 401(k) into an IRA, or open a new one, SoFi Invest® can help. SoFi doesn’t charge commissions (the full fee schedule is here), and you can access a complimentary 30-min session with a SoFi Financial Planner.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What happens if I max out my 401(k) every year?

Assuming you don’t overcontribute, you may see your retirement savings increase if you max out your 401(k) every year, and hopefully, be able to reach your retirement and savings goals sooner.

Will You Have Enough to Retire After Maxing Out 401(k)?

There are many factors that need to be considered, however, start by getting a sense of how much you’ll need to retire by using a retirement expense calculator. Then you can decide whether maxing out your 401(k) for many years will be enough to get you there, even assuming an average stock market return and compounding built in.

First and foremost, you’ll need to consider your lifestyle and where you plan on living after retirement. If you want to spend a lot in your later years, you’ll need more money. As such, a 401(k) may not be enough to get you through retirement all on its own, and you may need additional savings and investments to make sure you’ll have enough.

About the author

Ashley Kilroy

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.


Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.


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 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.

SOIN0123017

Read more
Feb
25
2025
What Happens to a 401k When You Leave Your Job?

What Happens to Your 401(k) When You Leave Your Job?

By | invest, Investing, Money & Life, Preparing for Retirement | Comments Off on What Happens to Your 401(k) When You Leave Your Job?

There are many important decisions to make when starting a new job, including what to do with your old 401(k) account. Depending on the balance of the old account and the benefits offered at your new job, you may have several options, including keeping it where it is, rolling it over into a brand new account, or cashing it out.

A 401(k) may be an excellent way for employees to save for retirement, as it allows them to save for retirement on a tax-advantaged basis, and also many employers offer matching contributions. Here are a few things to know about keeping track of your 401(k) accounts as you change jobs and move through your career

Key Points

•   When leaving a job, you have options for your 401(k) account, including leaving it with your former employer, rolling it over into a new account, or cashing it out.

•   If your 401(k) balance is less than $5,000, your former employer may cash out the funds or roll them into another retirement account.

•   If you have more than $5,000 in your 401(k), your former employer cannot force you to cash out or roll over the funds without your permission.

•   If you quit or are fired, you may lose employer contributions that are not fully vested.

•   It is important to consider the tax implications, penalties, and long-term financial security before making decisions about your 401(k) when leaving a job.

Quick 401(k) Overview

A 401(k) is a type of retirement savings plan many employers offer that allows employees to save and invest with tax advantages. With a 401(k) plan, an employer will automatically deduct workers’ contributions to the account from their paychecks before taxes are taken out. In 2025, employees can contribute up to $23,500 a year in their 401(k)s, up from $23,000 in 2024. Employees aged 50 and older can make catch-up contributions of $7,500 a year for a total of $31,000 in 2025, up from $30,500 in 2024. Also in 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0, for an annual total of $34,750.

Employees will invest the funds in a 401(k) account in several investment options, depending on what the employer and their 401(k) administrator offer, such as stocks, bonds, mutual funds, and target date funds.

The money in a 401(k) account grows tax-free until the employee withdraws it, typically after reaching age 59 ½. At that point, the employees must pay taxes on the money withdrawn. However, if the employee withdraws money before reaching 59 ½, they will typically have to pay 401(k) withdrawal taxes and penalties.

Some employers also offer matching contributions, which are additional contributions to an employee’s account based on a certain percentage of the employee’s own contributions. Employers may use 401(k) vesting schedules to determine when employees can access these contributions.

The more you can save in a 401(k), the better. If you can’t max out your 401(k) contributions, start by contributing at least enough money to qualify for your employer’s 401(k) match if they offer one.

What Happens to Your 401(k) When You Quit?

When you quit your job, you generally have several options for your 401(k) account. You can leave the money in the account with your former employer, roll it into a new employer’s 401(k) plan, move it over to an IRA rollover, or cash it out.

However, if your 401(k) account has less than $5,000, your former employer may not allow you to keep it open. If there is less than $1,000 in your account, your former employer may cash out the funds and send them to you via check. If there is between $1,000 and $5,000 in the account, your employer may roll it into another retirement account in your name, such as an IRA. You may also suggest a specific IRA for the rollover.

If you have more than $5,000 in your account, your former employer can only force you to cash out or roll over into another account with your permission. Your funds can usually remain in the account indefinitely.

Also, if you quit your job and you are not fully vested, you forfeit your employer’s contributions to your 401(k). But you do get to keep your vested contributions.

Is There Any Difference if You’re Fired?

If you are fired from your job, your 401(k) account options are similar to those if you quit your job. As noted above, you can leave the money in the account with your former employer, roll it into a new employer’s 401(k) plan, roll it over into an IRA, or cash it out. The same account limits mentioned above apply as well.

Additionally, if you are fired from your job, you may be eligible for a severance package, which may include a lump sum payment or continuation of benefits, including a 401(k) plan. But these benefits depend on your company and the circumstances surrounding your termination. And, like with quitting your job, you do not get to keep any employer contributions that are not fully vested.

How Long Do You Have to Move Your 401(k)?

If you leave your job, you don’t necessarily have to move your 401(k). Depending on the amount you have in the 401(k), you can usually keep it with your previous employer’s 401(k) administrator.

But if you do choose to roll over your 401(k) and it is an indirect rollover, you typically have 60 days from the date of distribution to roll over your 401(k) account balance into an IRA or another employer’s 401(k) plan. If you fail to roll over the funds within 60 days, the distribution will be subject to taxes and penalties, and if you are under 59 ½ years old, an additional 10% early withdrawal penalty.

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Next Steps for Your 401(k) After Leaving a Job

As you decide what to do with your funds, you have several options, from cashing out to rolling over your 401(k)s to expanding your investment opportunities.

Cash Out Your 401(k)

You can cash out some or all of your 401(k), but in most cases, there are better choices than this from a personal finance perspective. As noted above, if you are younger than 59 ½, you may be slammed with income taxes and a 10% early withdrawal penalty, which can set you back in your ability to save for your future.

If you are age 55 or older, you may be able to draw down your 401(k) penalty-free thanks to the Rule of 55. But remember, when you remove money from your retirement account, you no longer benefit from tax-advantaged growth and reduce your future nest egg.

Roll Over Your 401(k) Into a New Account

Your new employer may offer a 401(k). If this is the case and you are eligible to participate, you may consider rolling over the funds from your old account. This process is relatively simple. You can ask your old 401(k) administrator to move the funds from one account directly to the other in what is known as a direct transfer.

Doing this as a direct transfer rather than taking the money out yourself is important to avoid triggering early withdrawal fees. A rollover into a new 401(k) has the advantage of consolidating your retirement savings into one place; there is only one account to monitor.

Keep Your 401(k) With Your Previous Employer

If you like your previous employer’s 401(k) administrator, its fees, and investment options, you can always keep your 401(k) where it is rather than roll it over to an IRA or your new employer’s 401(k).

However, keeping your 401(k) with your previous employer may make it harder to keep track of your retirement investments because you’ll end up with several accounts. It’s common for people to lose track of old 401(k) accounts.

Moreover, you may end up paying higher fees if you keep your 401(k) with your previous employer. Usually, employers cover 401(k) fees, but if you leave the company, they may shift the cost onto you without you realizing it. High fees may end up eating into your returns, making it harder to save for retirement.

Does Employer Match Stop After You Leave?

Once you leave a job, whether you quit or are fired, you will no longer receive the matching employer contributions.

Recommended: How an Employer 401(k) Match Works

Look for New Investment Options

If you don’t love the investment options or fees in your new 401(k), you may roll the funds over into an IRA account instead. Rolling assets into a traditional IRA is relatively simple and can be done with a direct transfer from your 401(k) plan administrator. You also may be allowed to roll a 401(k) into a Roth IRA, but you’ll have to pay taxes on the amount you convert.

The advantage of rolling funds into an IRA is that it may offer a more comprehensive array of investment options. For example, a 401(k) might offer a handful of mutual or target-date funds. In an IRA, you may have access to individual securities like stocks and bonds and a wide variety of mutual funds, index funds, and exchange-traded funds.

Recommended: ​​What To Invest In Besides Your 401(k)

Test your understanding of what you just read.

The Takeaway

Changing jobs is an exciting time, whether or not you’re moving, and it can be a great opportunity to reevaluate what to do with your retirement savings. Depending on your financial situation, you could leave the funds where they are or roll them over into your new 401(k) or an IRA. You can also cash out the account, but that may harm your long-term financial security because of taxes, penalties, and loss of a tax-advantaged investment account.

If you have an old 401(k) you’d like to roll over to an online IRA, SoFi Invest® can help. With a SoFi Roth or Traditional IRA, investors can investment options, member services, and our robust suite of planning and investment tools. And SoFi makes the 401(k) rollover process seamless and straightforward — with no need to watch the mail for your 401(k) check. There are no rollover fees, and you can complete your 401(k) rollover quickly and easily.

Help grow your nest egg with a SoFi IRA.

FAQ

How long can a company hold your 401(k) after you leave?

A company can hold onto an employee’s 401(k) account indefinitely after they leave, but they are required to distribute the funds if the employee requests it or if the account balance is less than $5,000.

Can I cash out my 401(k) if I quit my job?

You can cash out your 401(k) if you quit your job. However, experts generally do not advise cashing out a 401(k), as doing so will trigger taxes and penalties on the withdrawn amount. Instead, it is usually better to either leave the funds in the account or roll them over into a new employer’s plan or an IRA.

What happens if I don’t rollover my 401(k)?

If you don’t roll over your 401(k) when you leave a job, the funds will typically remain in the account and be subject to the rules and regulations of the plan. If the account balance is less than $5,000, the employer may roll over the account into an IRA or cash out the account. If the balance is more than $5,000, the employer may offer options such as leaving the funds in the account or rolling them into an IRA.

Photo credit: iStock/chengyuzheng

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

SOIN1222030

Read more
Feb
25
2025
401(k) Vesting: What Does Vested Balance Mean?

401(k) Vesting: What Does Vested Balance Mean?

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on 401(k) Vesting: What Does Vested Balance Mean?

Your vested 401(k) balance is the portion you fully own and can take with you when you leave your employer. This amount includes your employee contributions, which are always 100% vested, any investment earnings, and your employer’s contributions that have passed the required vesting period.

Here’s a deeper look at what being vested means and the effect it can have on your retirement savings.

Key Points

•   401(k) vesting refers to when ownership of an employer’s contributions to a 401(k) account shifts to the employee.

•   401(k) contributions made by employees are always 100% vested; they own them outright.

•   Vesting schedules vary, but employees become 100% vested after a specified number of years.

•   401(k) vesting incentivizes employees to stay with their current employer and to contribute to their 401(k).

•   Companies may use immediate, cliff, or graded vesting schedules for their 401(k) plans.

What Does Vested Balance Mean?

The vested balance is the amount of money that belongs to you and cannot be taken back by an employer when you leave your job — even if you are fired.

The contributions you personally make to your 401(k) are automatically 100% vested. Vesting of employer contributions typically occurs according to a set timeframe known as a vesting schedule. When employer contributions to a 401(k) become vested, it means that the money is now entirely yours.

Having a fully vested 401(k) means that employer contributions will remain in your account when you leave the company. It also means that you can decide to roll over your balance to a new account, start making withdrawals, or take out a loan against the account, if your plan allows it. However, keeping a vested 401(k) invested and letting it grow over time may be one of the best ways to save for retirement.

💡 Recommended: How Much Should I Contribute to My 401(k)?

How 401(k) Vesting Works

401(k) vesting refers to the process by which employees become entitled to keep the money that an employer may have contributed to their 401(k) account. Vesting schedules can vary, but most 401(k) plans have a vesting schedule that requires employees to stay with the company for a certain number of years before they are fully vested.

For example, an employer may have a vesting schedule requiring employees to stay with the company for five years before they are fully vested in their 401(k) account. If an employee were to leave the company before reaching that milestone, they could forfeit some or all of the employer-contributed money in the 401(k) account. The amount an employee gets to keep is the vested balance. Other qualified defined contribution plans, such as 401(a) or 403(b) plans, may also be subject to vesting schedules.

💡 Recommended: What Happens to Your 401(k) When You Leave a Job?

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Importance of 401(k) Vesting

401(k) vesting is important because it determines when an employee can keep the employer’s matching contributions to their retirement account. Vesting schedules can vary, but typically after an employee has been with a company for a certain number of years, they will be 100% vested in the employer’s contributions.

401(k) Vesting Eligibility

401(k) vesting eligibility is the time an employee must work for their employer before they are eligible to receive the employer’s contribution to their 401(k) retirement account. The vesting period varies depending on the employer’s plan.

401(k) Contributions Basics

Before understanding vesting, it’s important to know how 401(k) contributions work. A 401(k) is a tax-advantaged, employer-sponsored retirement plan that allows employees to contribute a portion of their salary each pay period, usually on a pre-tax basis.

For tax year 2024, employees can contribute up to $23,000 annually in their 401(k) accounts, with an extra $7,500 in catch-up contributions allowed for those age 50 or older. For tax year 2025, employees can contribute up to $23,500, with an extra $7,500 in catch-up contributions allowed for those age 50 or older. For 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

The Internal Revenue Service (IRS) also allows employers to contribute to their employees’ plans. Often these contributions come in the form of an employer 401(k) match. For example, an employer might offer matching contributions of 3% or 6% if an employee chooses to contribute 6% of their salary to the 401(k).

In 2024, the total contributions that an employee and employer can make to a 401(k) is $69,000 ($76,500 including catch-up contributions). In 2025, the total contributions that an employee and employer can make to a 401(k) is $70,000 ($77,500 including standard catch-up contributions, and $81,250 with SECURE 2.0 catch-up for those aged 60 to 63).

Employer contributions are a way for businesses to encourage employees to save for retirement. They’re also an important benefit that job seekers look for when searching for new jobs.

💡 Recommended: How To Make Changes to Your 401(k) Contributions

Benefits of 401(k) Vesting

There are several benefits of 401(k) vesting, including ensuring that employees are more likely to stay with a company for the long term because they know they will eventually vest and be able to keep the money they have contributed to their 401(k). Additionally, it incentivizes employees to contribute to a 401(k) because they know they will eventually be fully vested and be entitled to all the money in their account.

401(k) vesting also gives employees a sense of security, knowing they will not lose the money they have put into their retirement savings if they leave their job.

Drawbacks of 401(k) Vesting

While 401(k) vesting benefits employees, there are also some drawbacks. For one, vesting can incentivize employees to stay with their current employer, even if they want to leave their job. Employees may be staying in a job they’re unhappy with just to wait for their 401(k) to be fully vested.

Also, using a 401(k) for investing can create unwanted tax liability and fees. When you withdraw money from a 401(k) before age 59 ½, you’ll typically have to pay a 10% early withdrawal penalty and taxes. This can eat into the money you were hoping to use for retirement.

How Do I Know if I Am Fully Vested in my 401(k)?

If you’re unsure whether or when you will be fully vested, you can check their plan’s vesting schedule, usually on your online benefits portal.

Immediate Vesting

Immediate vesting is the simplest form of vesting schedule. Employees own 100% of contributions right away.

Cliff Vesting

Under a cliff vesting schedule, employer contributions are typically fully vested after a certain period of time following a job’s start date, usually three years.

Graded Vesting

Graded vesting is a bit more complicated. A percentage of contributions vest throughout a set period, and employees gain gradual ownership of their funds. Eventually, they will own 100% of the money in their account.

For example, a hypothetical six-year graded vesting schedule might look like this:

Years of Service

 Percent Vested
1 0%
2 20%
3 40%
4 60%
5 80%
6 100%

Why Do Employers Use Vesting?What Happens If I Leave My Job Before I’m Fully Vested?

If you leave your job before being fully vested, you forfeit any unvested portion of their 401(k). The amount of money you’d lose depends on your vesting schedule, the amount of the contributions, and their performance. For example, if your employer uses cliff vesting after three years and you leave the company before then, you won’t receive any of the money your employer has contributed to their plan.

If, on the other hand, your employer uses a graded vesting schedule, you will receive any portion of the employer’s contributions that have vested by the time they leave. For example, if you are 20% vested each year over six years and leave the company shortly after year three, you’ll keep 40% of the employer’s contributions.

Other Common Types of Vesting

Aside from 401(k)s, employers may offer other forms of compensation that also follow vesting schedules, such as pensions and stock options. These tend to work slightly differently than vested contributions, but pensions and stock options may vest immediately or by following a cliff or graded vesting schedule.

Stock Option Vesting

Employee stock options give employees the right to buy company stock at a set price at a later date, regardless of the stock’s current value. The idea is that between the time an employee is hired and their stock options vest, the stock price will have risen. The employee can then buy and sell the stock to make a profit.

Pension Vesting

With a pension plan, vesting schedules determine when employees are eligible to receive their full benefits.

How Do I Find Out More About Vesting?

There are a few ways to learn more about vesting and your 401(k) vested balance. This information typically appears in the 401(k) summary plan description or the annual benefits statement.

Generally, a company’s plan administrator or human resources department can also explain the vesting schedule in detail and pinpoint where you are in your vesting schedule. Understanding this information can help you know the actual value of your 401(k) account.

Test your understanding of what you just read.

The Takeaway

While any employee contributions to 401(k) plans are immediately fully vested, the same is not always true of employer contributions. The employee may gain access to employer contributions slowly over time or all at once after the company has employed them for several years.

Understanding vesting and your 401(k)’s vesting schedule is one more piece of information that can help you plan for your financial future. A 401(k) and other retirement accounts can be essential components of a retirement savings plan. Knowing when you are fully vested in a 401(k) can help you understand how much money might be available when you retire.

There are many ways to save for retirement, including opening a traditional or Roth IRA. To get started with those, you can open an online retirement account on the SoFi Invest® platform.

Find out more about investing with SoFi today.

FAQ

What does 401(k) vesting mean?

401(k) vesting is when an employee becomes fully entitled to the employer’s matching contributions to the employee’s 401(k) account. Vesting typically occurs over a period of time, such as five years, and is often dependent on the employee remaining employed with the company.

What is the vesting period for a 401(k)?

The vesting period is the amount of time an employee must work for an employer before they are fully vested in the employer’s 401(k) plan. This period is different for each company, but generally, the vesting period is between three and five years.

How does 401(k) vesting work?

Vesting in a 401(k) plan means an employee has the right to keep the employer matching contributions made to their 401(k) account, even if they leave the company. Vesting schedules can vary, but most 401(k) plans have a vesting schedule of three to five years.

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.


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.

SOIN0622047

Read more
Feb
13
2025

12 Tips for the Cheapest Way to Rent a Car

By | Budgeting & Goals, money | Comments Off on 12 Tips for the Cheapest Way to Rent a Car

There’s nothing like the convenience and freedom of having a car at your disposal when traveling, but it can definitely add to the cost of a trip.

What’s more, it can be hard to know just how much a car rental will add to the bottom line because the daily rate you see advertised may wind up not reflecting the amount you will pay once surcharges are added to the bill.

But with some smart strategies, you can control the costs of renting a car. These include uncovering special offers and deals, knowing which day of the week is cheapest to rent a car, and avoiding those pricey add-ons that you don’t truly need.

Key Points

•   Booking car rentals early and being flexible with travel dates can lead to better deals and lower rates.

•   Joining loyalty programs can provide discounts, free upgrades, and other perks.

•   Noting pre-existing damage on the rental vehicle helps avoid unnecessary charges and disputes.

•   Understanding add-on costs is essential to avoid unexpected expenses and keep the total rental cost under control.

•   Choosing smaller cars and avoiding unnecessary add-ons can help save money on car rentals.

12 Tips to Save Money on Car Rentals

These tactics can help you save money the next time you rent some wheels while traveling.

1. Understanding All Those Add-On Costs

At first glance, advertised deals on car rentals can seem inexpensive.

The sticker shock may come once you’re actually at the counter. That’s because, in addition to the base rate of a rental car, costs may include:

•   Additional driver cost. Are you going to be the only driver or will you be sharing driving duties with someone else? If someone else will be driving, it’s a good idea to add them to the rental to potentially avoid liability if something were to happen if someone else were behind the wheel.

•   Fuel Purchase Option (FPO). This option allows a renter to pay for the full tank of gas at the time of rental and return the tank empty. It may be cheaper to fill the tank yourself. However, if you are the kind of person who likely returns a car close to the deadline and is racing to catch a flight, the FPO can save time and might be worth it.

•   Fuel and Service. If you forgo the FPO and don’t return the car with a full tank, you will likely be charged for the cost of fuel, as well as a fee for the refueling service.

•   Insurance. Insurance can include Loss Damage Waiver, Liability Insurance, Personal Accident Insurance, and Personal Effects Coverage. This insurance may or may not be necessary, depending on your existing car insurance coverage or the possibility of coverage via the credit card used for the reservation.

•   Premium Emergency Roadside Service. This service can provide roadside assistance in the event of an emergency.

•   Additional fees and taxes. Fees and taxes are not optional and can add up. Taxes and fees are dependent on where you rent your vehicle (different states have different taxes). There is typically an additional fee for cars rented at an airport or a hotel, which can add to your bill and take a bite out of your checking account.

•   Toll fees. This typically includes not only the cost of driving on toll roads, but also convenience fees for having a transponder included in your rental to seamlessly pay those charges.

By knowing which charges can crop up and scanning for them, you may be able to avoid those extra costs. (Think of how many people opt for online banks vs. traditional ones to save on fees; it’s the same “do your research and save” principle at work.)

Recommended: How to Save Money on Gas

2. Considering Your Insurance Coverage

One way to get the cheapest possible deal on a rental car is to make sure you’re not doubling up on insurance coverage.

Find out what your car insurance covers. It may cover collision damage, and your homeowner’s or renter’s insurance may cover personal items that could be stolen from your vehicle.

But the disadvantage would be that if the worst were to happen, you would need to file a claim through your personal insurance, which could cause your rate to increase.

As noted above, your credit card’s car rental coverage may be a money-saving option. This can be a good travel hack that allows you to waive the insurance offerings from a rental car company yet not need to use your personal car insurance to file a claim.

Some pointers:

•   If you are renting a car with a credit card, as many people do, find out if your card has the coverage you need. You can check your card’s benefits to see if it includes primary car rental coverage. If it does, it’s a good idea to read the fine print for exactly what the insurance covers, as well as any coverage limits.

•   Calling your credit card company, as well as your car and home insurance companies, with any questions can give you a full picture of whether or not added car rental insurance is necessary for your situation.

You may also be able to waive roadside service if you have a membership to another roadside assistance company.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 3.80% APY on savings balances.

Up to 2-day-early paycheck.

Up to $3M of additional
FDIC insurance.


3. Looking Beyond Airports and Hotels

Because of the fees associated with renting from an airport or hotel — which can add as much as 26% to your total bill — it may be cheaper to rent from an outpost within the city.

The flip side is that it’s less convenient, and you may need to take a taxi or use a rideshare service to get to and from the car rental agency.

Comparing costs of rentals both at the airport and within 20 miles (adding in the cost of getting to that other location) can help you assess whether giving up some convenience will pay off.

4. Signing Up for Loyalty Programs

Before you rent a car, it can be helpful to sign up for several loyalty programs across rental companies. (To avoid junk mail, consider creating a separate email address to register for loyalty programs.)

Some rental car programs will give you an automatic percentage off just for being a member. Other rental car programs may give additional perks, such as upgrades or separate lines at the agency, which can help you avoid the hassle.

5. Using Your Memberships

There are various ways to snag a reduced price on your car rental, including working your memberships.

Many big-box stores and wholesale clubs have ties with rental car companies that can net you significant discounts if you’re a member. Auto clubs (like AAA), trade associations, unions, as well as AARP, may also offer rental car perks and discounts, including insurance on rental cars.

Shop around, and don’t be surprised if the most enticing deals and ways to spend less emerge from an unexpected source.

6. Booking Early

Reserving a car as soon as you know your travel dates can be a money-wise move. Here’s why: Rental car companies often keep a limited number of cars in their fleets. As a result, they need to estimate demand several weeks ahead of time. To encourage customers to book early and help them manage their pool of vehicles, they may offer lower rates when you reserve in advance vs. last-minute.

Booking a car in advance can help you not only get a better deal but also help to ensure you’ll get the car you want. This can help you avoid paying for a Suburban when all you need is an economy car.

If you do book early, consider searching prices again right before your trip.

•   If you find a better deal last-minute, you may be able to request a price adjustment from your original agency.

•   Or you may be able to cancel your current reservation and book a cheaper reservation at another company.

Before you book, you may want to read through the cancellation policy and make sure there is no penalty for canceling.

7. Shifting Your Dates

Prices of rental cars can fluctuate based on demand, and these fluctuations can sometimes be significant.

Of course, you can’t always change the days of your trip. But as a frugal traveler, you may want to weigh the cost-benefit of not having a rental car for a few days to score a lower rate.You could reap significant savings.

The cheapest day to rent a car can vary depending on market demand, but you may see lower rates on weekdays versus weekends, according to AAA.

8. Noting Any Damage Before You Drive Away

You may be eager to get on the road, but it’s a good idea to do your due diligence and make sure you point out and/or document any damage to the car when you receive it. Consider the following:

•   No matter how minor a scratch or ding, you could get charged for the damage unless you account for it on your rental agreement prior to driving away.

•   You may be asked to mark damage on the car rental agreement, but you may also want to take photos as well. That way, there is less likely to be any dispute about the extent of any damage or markings.

Recommended: Different Ways to Earn More Interest on Your Money

9. Paying Tolls in Cash if You Can

Rental car companies commonly tack on fees for using their transponder (the gizmo that lets you whiz past toll booths), in addition to the toll itself.

You may also have to pay a daily convenience fee for having the transponder even if you don’t use it.

To avoid using the rental company’s transponder, try these hacks:

•   Pay cash at tolls that still accept it. For cashless tolls, you may be able to pay online later.

•   It may also be possible to use your own transponder. Some transponders (such as E-ZPass) can be used in multiple states, so it could be worth doing your research beforehand to see if your personal transponder is accepted.

•   For a longer-term rental, you might consider buying a transponder or toll pass that is accepted in the state where you’ll be driving. In many cases, the fee for the pass goes into your account as credit for tolls.

10. Bringing Your Own Car Seat

Rental car companies may offer infant and child car seat rental options, but the additional charges can add up. You might pay $10 to $15 per day, per seat, plus tax, up to a cap of $84, give or take.

In addition to the cost, you may not necessarily know the size and reliability of a rental car seat.

Obviously, it is not always convenient to bring your own seat, but it may be a better bet when possible. Even though car seats are bulky, airlines typically don’t charge baggage fees on them.

11. Think Small and Simple

This one may be obvi, but renting a larger or premium car will likely jack up your costs considerably. Though this is a no-brainer, it’s easy to creep into higher pricing tiers as you scroll through the options and see a cool SUV or convertible next to that economy sedan you originally thought you wanted to book.

For example, a recent search on Kayak found that rental cars can range from $22 to $150 a day or more in Los Angeles, depending on the company, location, and car itself (from compacts to SUVs, from minivans to luxurious convertibles). That’s a major difference!

Recommended: How to Make Money Fast

12. Let One Person Do the Driving

It’s not always possible, of course, to have a single driver (say, if you’re criss-crossing the United States), but for shorter distances, having just one driver can help you save money.

Many rental car agencies will add $3 to $11 or more a day for an additional driver who is not a spouse, domestic partner, or business partner. This can vary by state and have a maximum charge per rental period So, if you are on a trip with a friend and the distances are fairly short (perhaps zipping between Miami and the Florida Keys), having just one driver can help cut rental car costs.

The Takeaway

Car rentals often end up costing more than you expect, due to add-on costs and the details of when and where you rent a vehicle. To get the best deal on a rental, it’s a good idea to do some research in advance so you can get the best rates and opt out of the extras you don’t need.

You can also explore other ways to get a good deal, such as looking for discounts through clubs and organizations you already belong to, shifting your dates slightly, and trying other clever hacks. This can help you keep more money in the bank vs. overspending on your wheels.

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


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

FAQ

How can you get a discount on a rental car?

Strategies for getting a discount on a rental car include comparing prices using online aggregator sites, booking early, being flexible about when and where you pick up and drop off the vehicle, and looking for memberships (like AAA) and perks (like credit card points) that can help you lower costs.

Is it cheaper to rent a car by the week or by the day?

It’s typically cheaper to rent a car by the week. You may even find that paying to rent a car for a week when you only need the vehicle for five days is more affordable than renting it for five single days.

How can you get around car rental fees?

It’s important to do your research about what fees may be added and see how you can minimize them. For instance, does your car insurance or your credit card offer insurance coverage when you rent a car? Can you bring your own car seat vs. renting one if traveling with a child? Can you avoid the surcharge often charged when you rent at the airport by instead taking a short cab or bus ride to another location? These moves can help lower costs.

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 Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. 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 during a 30-day Evaluation Period (as defined below).

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 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, 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 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY 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, 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 members with Eligible 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 Eligible 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 an Eligible Direct Deposit or receipt of $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 Eligible 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 Eligible 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 Eligible 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 Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible 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.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://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.

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 Checking & Savings Fee Sheet for details at sofi.com/legal/banking-fees/.
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.


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.

SOBNK-Q125-025

Read more
Close modal

See what SoFi can do for you and your finances.

Select a product below and get your rate in just minutes.

Student Loan
Refinancing

Personal
Loans

Online
Investments

Other

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

©2025 Social Finance, LLC All rights reserved.
TLS 1.2 Encrypted
Equal Housing Lender