Investing

Reviewed by Somer Anderson
Fact checked by Vikki Velasquez

The National Bureau of Economic Research (NBER) defines a recession as a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale retail trade. It is caused by a chain of events in the economy, such as disruptions to the supply chain, a financial crisis, or a world event.

A recession can also be triggered after an inflationary period. When inflation increases, central banks raise interest rates to slow the economy with the goal of bringing down inflation. With higher interest rates, the probability of a recession increases, leading to layoffs, fewer jobs, and decreased consumer and corporate spending, among other effects found in a slowing economy.

As companies and consumers become anxious about the economy, they hold onto their money and cut spending. Businesses are forced to reallocate resources, scale back production, limit losses, and lay off employees as the economic downturn intensifies. Trends during a recession include an increase in the unemployment rate and a decrease in gross domestic product (GDP) for two consecutive quarters.

Key Takeaways

• A recession is a trend of simultaneously slowing business and consumer activity, leading to negative growth as measured by gross domestic product (GDP) and other data, such as the unemployment rate, wage growth, and the like.
• Financial, psychological, and real economic factors can cause recessions, such as supply chain disruptions or a financial crisis.
• The recession in 2020 was affected by COVID-19 and the preceding decade of extreme monetary stimulus that left the economy vulnerable to economic shocks.
• Though the economy has grown since 2022, some economists say a recession is still possible by the end of 2025.

Signs of a Recession

The standard macroeconomic definition of a recession is two consecutive quarters of negative GDP growth. When this occurs, private businesses often scale back production and try to limit exposure to systematic risk. Measurable levels of spending and investment are likely to drop, and a natural downward pressure on prices may occur as aggregate demand slumps. GDP declines and unemployment rates rise because companies lay off workers to reduce costs.

At the microeconomic level, firms experience declining margins during a recession. When revenue—whether from sales or investment—declines, firms look to cut their least efficient activities. For example, a firm might stop producing low-margin products or reduce employee compensation. It might also renegotiate with creditors to obtain temporary interest relief. Unfortunately, declining margins may force businesses to reduce employment to cut costs further.

Important

A range of financial, psychological, and real economic factors are at play in any given recession.

Causes of a Recession

There are financial, psychological, and fundamental economic factors that can lead to the cascade of business failures that constitute a recession. Some theories look at long-term economic trends that lay the groundwork for a recession in the years leading up to it. Others look only at the immediately visible factors that appear at the onset of a recession. Many or all of these various factors may be at play in any given recession.

Financial Factors of a Recession

Financial factors can contribute to an economy’s fall into a recession, as during the 2007–2008 U.S. financial crisis. The overextension of credit and debt on risky loans and marginal borrowers can lead to an enormous buildup of risk in the financial sector. The expansion of the supply of money and credit in the economy by the Federal Reserve and the banking sector can drive this process to extremes, stimulating risky asset price bubbles.

Artificially suppressed interest rates during the boom times leading up to a recession can distort the structure of relationships among businesses and consumers. It happens by making business projects, investments, and consumption decisions that are interest rate-sensitive, such as buying a bigger house or launching a risky long-term business expansion, appear much more appealing than they ought to be. The failure of these decisions when rates rise to reflect reality constitutes a major component of the rash of business failures that make up a recession such as that of 2007–2008.

Psychological Factors of a Recession

Psychological factors are also frequently cited by economists for their contribution to recessions. The excessive exuberance of investors during the boom years brings the economy to its peak. The reciprocal doom-and-gloom pessimism that sets in after a market crash, at a minimum, amplifies the effects of real economic and financial factors as the market swings.

Moreover, because all economic actions and decisions are always forward-looking to some degree, the subjective expectations of investors, businesses, and consumers are often involved in the inception and spread of an economic downturn.

Interest Rates

Interest rates are a key link between the purely financial sector and the real economic preferences and decisions of businesses and consumers.

Economic Factors of a Recession

Real changes in economic fundamentals, beyond financial accounts and investor psychology, also make critical contributions to a recession. Some economists explain recessions solely due to fundamental economic shocks, such as disruptions in supply chains, and the damage they can cause to a wide range of businesses.

Shocks affecting vital industries such as energy or transportation can have such widespread effects that they cause many companies across the economy to retrench and cancel investment and hiring plans simultaneously, with ripple effects on workers, consumers, and the stock market.

There are economic factors that can also be tied back to financial markets. Market interest rates represent the cost of financial liquidity for businesses and the time preferences of consumers, savers, and investors for present versus future consumption. In addition, a central bank’s artificial suppression of interest rates during the boom years before a recession distorts financial markets and business and consumption decisions. All of these factors may cause a recession over time.

In turn, the preferences of consumers, savers, and investors place limits on how far such an artificially stimulated boom can proceed. These manifest as economic constraints on continued growth in labor market shortages, supply chain bottlenecks, and spikes in commodity prices (which lead to inflation). When not enough resources can be made available to support all of the business investment plans, a rash of business failures may occur due to increased production costs. This situation may be enough to tip the economy into a recession.

Impact of COVID-19 Pandemic on the Economy

In February 2020, the National Bureau of Economic Research (NBER) announced that, according to its data, the United States was in a recession due to the economic shock of the widespread disruption of global and domestic supply chains and direct damage to businesses across all industries. These events were caused by the COVID-19 epidemic and the public health response.

Some of the underlying causes of the two-month recession (and economic hardship) in 2020 were the overextension of supply chains, razor-thin inventories, and fragile business models.

The pandemic-related recession, according to NBER, ended in April 2020.

Are There Any Risks of a Recession as of March 2025?

As of March 2025, a number of economic data points are positive, including:

• A rate of inflation down to 2.8% as of February 2025
• Fourth quarter (4Q) 2024 GDP growth of 2.3%
• A strong job market in which jobs are still rising
• Low unemployment at 4.1% as of October 2024

The Fed slowed the pace of its interest rate increases in 2023, aiming for an upper limit final Fed funds target rate of 5.5%, also referred to as the terminal rate. As of February 2025, the effective federal funds rate was 4.33%.

Higher interest rates make everything from home mortgage rates to credit card rates rise, which eats away at consumer spending, ultimately the key driver of U.S. economic activity. By easing interest rates while inflation and unemployment remain low, the Fed hopes to deliver a soft landing (lower inflation and a minor slowdown in the U.S. economy), rather than a hard landing (where inflation comes down at the expense of economic growth and employment). A hard landing would be likely to result in a recession.

Economists will continue to pay special attention to the state of consumer spending, unemployment, and job creation as the main bellwethers of a recession.

What Is a Recession?

A recession is when economic activity turns negative for a sustained period of time, the unemployment rate rises, and consumer and business activity are cut back due to expectations of a weak growth environment ahead. While this is a vicious cycle, it is also a normal part of the overall business cycle, with the only question being how deep and long a recession may last.

Is the Fed Still Raising Interest Rates?

The Fed raised rates in July 2023, to a range of 5.25% and 5.5% after a pause. As of December 2024, however, the rate has decreased to a range of 4.25% to 4.50%.

Do Prices Go Down in a Recession?

Prices often go down in a recession because people are buying less, which means businesses lower prices to encourage consumer spending. Not all prices decrease, however. Some items, such as food and gas, may see price increases, especially if there is a decreased supply or increased demand.

The Bottom Line

Recessions are caused by a multitude of factors, with higher interest rates usually cited as the primary cause of a recession. To combat inflation, the Fed and other central banks aggressively raised interest rates to bring inflation down to their target of around 2%. However, this trend has seemed to slow down.

The hope is for a soft landing, where interest rates reach a level to bring down inflation and avoid a recession. The alternative is a hard landing, where the Fed raises rates too much and triggers a recession.

These tips will reduce the complications that come with the job

Reviewed by Marguerita Cheng
Fact checked by Yarilet Perez

Being named executor of an estate can be daunting for those who are unprepared for the task. However, taking some simple steps while the testator is living can make the job much easier.

If you and the person who chose you as executor get together and properly plan for the responsibilities ahead, you will both have greater peace of mind.

Key Takeaways

• The executor of an estate has numerous responsibilities, including tracking estate documents, recording the testator’s preferences, and identifying estate assets.
• With proper preparation, you and the testator can be confident you’ll carry out your responsibilities as executor properly.
• The testator should have already compiled all of the relevant documentation as part of the process of writing a will.

1. Know the Location of the Will and Other Documents

The first and most important step is to know where the will and other estate documents are kept. The executor’s job is easier if the testator keeps the original will, deeds, insurance policies, partnership documents, or other important papers in an agreed-upon location, such as in a home safe or bank safe deposit box. It’s also a good idea to keep copies at a backup location. The copies can be held directly by the executor or by the testator’s lawyer.

Remember that access to a safe deposit box could be restricted once the testator dies. To avoid losing access, make sure that another person, such as a spouse, has access to the box.

2. Make Property and Accounts Joint

A testator who has a spouse will want to be sure that the assets transfer to their control quickly and seamlessly.

The simplest way to ensure this is to set all accounts as joint and make sure that properties and titles are in both names. This also applies to business enterprises involving a partner. This has the added benefit of reducing the size of any estate taxes that are due as long as both spouses do not die simultaneously.

The executor should also have the testator confirm that the correct beneficiary is named for all accounts that demand a specification. These include pensions, retirement accounts, bank accounts, insurance policies, and brokerage accounts.

The list of beneficiaries will need to be updated if the testator is divorced, remarried, outlives a child, or experiences some similarly significant event.

3. Record the Testator’s Preferences

If you don’t know, you should ask how the testator prefers to be memorialized.

A testator may prefer a burial plot over cremation or a private funeral over a large wake. Other popular preferences may include requested donations to a favorite charity or guardianship provisions for minor children.

These preferences should be written down and signed by the testator. Planning it out in advance will be a relief to the person’s heirs as well.

4. List Possessions and Assign Recipients

Many executors overlook one common problem—dispersing personal possessions with little financial value but great sentimental value.

Working with the testator, an executor can create a rough list of personal items and a system of distribution for each item. The testator could also provide reasoning for why each person should receive particular items.

Documenting recipients for sentimental items may offer comfort to the testator and avoid family squabbles later. Moreover, it will help the executor track down loans or gifts given during the testator’s lifetime.

High-net-worth individuals (HNWIs) frequently give financial gifts before death. Organized dispersal can make an executor’s job easier and help balance issues of fairness.

Important

The executor should have the testator confirm that the correct beneficiary is named for pensions, financial accounts, and insurance policies. This will ensure that the accounts are transferred promptly.

5. Set Up a Yearly Accounting Sheet and Updating Schedule

Computers make it easier to track changes in accounts and possessions. If the testator keeps track of the estate electronically, the executor will have a good snapshot of assets when it’s needed.

Keeping an electronic estate document also cuts the time spent looking for that gold watch the testator gave to a grandchild or tracking funds that have been transferred to another account.

6. Have a Sealed Online Accounts Document

An executor should have a record of the testator’s online accounts on sites such as LinkedIn, Facebook, Paypal, and eBay so that the accounts can be deactivated once the testator passes. The same goes for paid memberships to sites like Spotify or Netflix.

In most cases, accounts can be deactivated by presenting a copy of a death certificate. Having a list will simplify this process and ensure that any paid subscriptions get canceled.

7. Know the Relevant Professionals

Executors should have contact details for the testator’s accountant, lawyer, and other professionals who may be involved with the estate.

These professionals may have further information or advice specific to the testator’s situation.

What Are the Duties of an Executor?

The main duty of an executor is to carry out the instructions of a deceased person regarding the distribution of the person’s assets upon his or her death. The executor is named by the testator or by a court.

As such, the executor must make sure that all of the testator’s financial assets and personal possessions wind up in the right hands as promptly as possible.

The executor is also responsible for tying up any loose ends, such as paying bills owed by the testator and closing accounts.

How Do I Choose an Executor?

The most important factor is to choose someone you know to be trustworthy and capable. Most people choose a family member or close personal friend. From a practical viewpoint, the person should live nearby. Some states have specific restrictions but these are usually limited: the person must be at least 18 years old, be a U.S. resident, and not be incapacitated.

Are There Downsides to Being an Executor?

Serving as an executor is a big responsibility, and should only be willingly undertaken for a dear friend or family member. It can be stressful, time-consuming, and put you in the middle of family squabbles that don’t concern you.

The Bottom Line

Preparation can greatly reduce the complications of being an executor. Taking the steps above while the testator is alive will help you carry out his or her wishes properly.

Testators can also be proactive about setting up such processes to make their executor’s job easier.

Learn about the key differences, risks, and potential returns

Fact checked by Suzanne Kvilhaug
Reviewed by JeFreda R. Brown

Equity Funds vs. Income Funds: An Overview

When investing money, you’re faced with many choices. Two well-known categories of investments are equity funds and income funds. But what exactly are they, and which one is right for you?

Let’s start by defining them. Equity funds are pooled investments that primarily invest in stocks and offer the potential for higher returns, but they have more risk. Income funds, meanwhile, focus on generating regular income through investments in fixed-income securities like bonds or the money market. They are also used to mitigate risk. Both are among the many available mutual and exchange-traded funds (ETFs).

So, how do you decide between the two? Peter Lazaroff, an Investopedia top-10 financial advisor, cautions against thinking that income funds provide regular payments while equity funds are purely for growth or capital appreciation. He suggests that this classic financial information doesn’t fit a market with far more resources and options for investors.

“I am more interested in total returns than the income of any given product because you give me a dollar, it’s a dollar no matter what,” says Lazaroff.

Key Takeaways

• Equity funds primarily hold stocks and offer the potential for higher returns and risks.
• Income funds can generate regular income through investments in fixed-income securities but also help lower a portfolio’s overall risk.
• When choosing between equity funds and income funds, consider the risk and return profiles and your investment goals.
• Given the diversity of offerings now available, there isn’t the hard-and-fast distinction between equity funds and income funds that there once was.

Traditionally, equity funds focused on stocks for growth or capital appreciation, while income funds prioritized bonds or dividend-paying stocks for steady cash flow. However, modern portfolio theory and the emergence of blended or hybrid funds offer investors approaches that balance growth and income according to their individual risk tolerances and goals. As such, the split between income and equity funds isn’t rigid, with many investors choosing funds offering equity growth potential and income generation.

Lazaroff recommends considering your investment goals and risk tolerance before choosing different funds. “If you need current income” and “like the certainty of a dividend,” you might steer toward income funds, he says. However, he adds, “Dividends get cut in recessions, too. The range of retirement outcomes is better and broader when you take a total return approach than when you use just an income-focused approach to investing.”

Looking at the total returns means understanding the characteristics and risks of each investment, along with their tax implications—all to better inform your decisions while you build out your portfolio.

Equity Funds

Equity funds primarily invest in stocks, which represent fractional ownership in a company. Equity funds can be actively managed by those who select stocks based on research and analysis or passively manage to track a specific stock market index like the S&P 500.

Equity Fund Types

Equity fund managers choose their strategies based on their investors’ needs. Growth fund managers focus on companies with the potential to grow their earnings and expand their market share. Meanwhile, value fund managers search for undervalued stocks trading below their intrinsic worth, expecting them to appreciate over time.

Let’s break down the equity fund types. First, the distinction between growth and value investing is based on the characteristics of the companies in which the funds invest rather than their size:

• Growth funds: These focus on companies expected to grow faster than the overall market, often in sectors like technology or healthcare. They carry greater risk in return for more potential rewards.
• Value funds: These look for companies with solid fundamentals trading at a price lower than their intrinsic value.
• Blend funds: These channel money into a mix of growth and value stocks, giving a portfolio more balance.

Equity funds are also organized by the size of the companies in which they invest:

• Large-cap funds: These hold the stocks of large, well-established companies with market capitalizations typically exceeding $10 billion, though this figure changes over time.
• Midcap funds: These hold the stock of medium-sized companies, generally with market capitalizations of $2 billion to $10 billion.
• Small-cap funds: These invest in smaller companies with market capitalizations typically under $2 billion. Small caps usually have more growth potential but carry more risk.

Investors can combine investments in growth and value funds with different market capitalizations to align with their investment goals and risk tolerance. For example, an investor might choose a large-cap value fund for stability and a small-cap growth fund for potential higher returns, understanding that the small-cap fund may have more volatility.

Equity funds often focus on particular segments of the market to cater to different investor strategies and risk profiles:

• Sector funds: These focus on specific parts of the economy, such as technology, healthcare, energy, or financial services.
• International funds: These put money into stocks of companies based outside the investor’s home country, providing exposure to global markets and potentially benefiting from diversification.
• Emerging market funds: These invest in stocks of companies based in developing economies, such as China, India, or Brazil. These markets have more growth potential but also come with greater risks.

Index Funds

Given their popularity and success—S&P 500 Index funds frequently outperform their actively managed peers—it’s worth setting out these equity funds on their own. Index funds are designed to mirror the performance of a specific equity index like the S&P 500 or Russell 2000. They provide broad market exposure and diversification at a lower cost than other funds. The advantage of index funds lies in their broad market exposure, making them a go-to investment for both novice and experienced investors alike.

Risk and Return

Equity funds generally carry higher risk compared with income funds because of the inherent volatility of the stock market. However, they also offer the potential for higher returns over the long term.

The precise risk and return of an equity fund will depend on the underlying stocks in its portfolio and overall market conditions. Factors that can affect the risk and return of an equity fund thus include investment style or focus, economic conditions, market sentiment, company-specific events, and geopolitical risks. Equity funds holding small-cap or emerging market stocks often have more risk than those investing in large-cap or developed-market stocks.

How to Analyze Equity Fund Performance

Historically, equity funds have, on average, outperformed fixed-income investments over the long term. However, this depends on the time frame. In addition, past performance does not guarantee future results, and investors should carefully assess a fund’s track record and management before investing.

Here are the key metrics to review:

• Alpha: This instead measures the fund’s excess return relative to its benchmark, indicating the manager’s skill in selecting stocks.
• Benchmarks: These are comparable indexes used to gauge a fund’s performance.
• Sharpe ratio: This helps you assess risk-adjusted returns. Generally, a higher Sharpe ratio is preferred.
• Total returns: This measures the fund’s overall performance, including capital appreciation and dividends.
• Volatility: This measures the fund’s average price fluctuations.

These can all be found on many investor and brokerage platforms, including Investopedia.

Pros

• Potential for higher returns

• Often managed by professional fund managers

• Diversified portfolio of stocks

• Highly liquid (transferable into cash)

Cons

• Subject to greater risk than income funds

• Actively managed equity funds can charge high fees

• No control over the fund’s portfolio

Income Funds

Income funds generate regular income for investors by investing in fixed-income securities such as bonds, Treasurys, certificates of deposit (CDs), preferred shares, and money market instruments. Many use these funds to provide a steady income through interest and dividends while preserving their capital.

However, Lazaroff, host of the education podcast The Long Term Investor, says it’s a bit of a misnomer when these funds are labeled “fixed-income.” “I am a big believer that the role of bonds in a portfolio is to reduce the overall volatility of the portfolio,” he says, pointing to the major asset found in most income funds.

By putting a part of your savings into funds with bonds, CDs, and so on, you’re balancing out the heightened risks of the part of your portfolio in equities. “The fact that they’re called fixed income creates this image in our head that it should be all about the income where it’s just descriptive,” Lazaroff says.

In other words, despite the name, it’s wise to think of “income funds” as helping to keep your portfolio balanced rather than solely as a source of regular income.

Putting part of your portfolio into income funds can smooth out the stock market’s ups and downs to create a more stable investment mix. This approach can be essential for investors nearing retirement or those with a lower risk tolerance.

Lazaroff has written in Investopedia about a popular way to balance income and equity funds through the 60/40 portfolio structure. Ultimately, he says, the key is to create a well-rounded portfolio that aligns with your financial goals, time horizon, and risk tolerance.

Income Fund Types

Income funds often hold a diversified portfolio of bonds and similar securities with varying maturities and credit qualities, which helps mitigate risk.

One common strategy that income funds employ is laddering, where the fund invests in bonds with different maturity dates. This approach enables the fund to manage interest rate risk (potential losses from changes in interest rates) effectively and ensure more consistency since the bonds mature at different times and can be reinvested at prevailing rates.

In addition, income fund managers pay close attention to the credit quality of the underlying securities. They may opt for investment-grade bonds with a lower risk of default or venture into high-yield bonds, also known as junk bonds, which offer higher income potential but come with increased risk.

Income funds also manage the duration of their holdings to adjust the fund’s sensitivity to interest rate changes. In addition, some income funds specialize in specific sectors. For example, they may focus on tax-advantaged municipal bonds, which offer tax-free income to investors, or emerging market debt, which can provide higher yields but carries higher risk. Others invest across various sectors and geographies to spread risk and improve the chances of improved returns. This diversification helps mitigate sector-specific risks and capitalize on prospects in different markets.

Risk and Return

Income funds generally have less risk than equity funds since they primarily hold fixed-income securities. However, they also offer lower potential returns. An income fund’s risk and return mix depends on the underlying securities’ credit quality, interest rate changes, and the fund’s management.

Income funds are naturally exposed to a certain degree of risk, and the bond issuer may default on interest or principal payments. There’s also interest rate risk, where bond prices may fall when interest rates rise. Income funds investing in high-yield (junk) or emerging market bonds tend to carry higher credit risk than those investing in investment-grade or developed-market bonds.

How to Analyze Income Fund Performance

Income funds typically provide more stable returns in the form of regular interest payments. However, their performance will be influenced by interest rate changes and the credit quality of their securities.

While interest rates are rising, the value of existing bonds may decrease, affecting the fund’s net asset value. Conversely, bond prices may increase during periods of falling interest rates, providing capital appreciation and regular income.

Some metrics can significantly help with your assessment of different income funds. As with equity funds, there are metrics for total return and expense ratio, which is the fund’s operating costs given as a percentage of assets.

Noteworthy, too, are the measures of yield, which indicate the fund’s ability to generate income. There are several types:

• Distribution yield: This is based on the income distributed by the fund in the most recent annualized period. It indicates the income generated by the fund but is also backward-looking.
• SEC (Securities and Exchange Commission) yield: A standardized 30-day yield that reflects the interest earned by the fund’s investments minus the fund’s expenses.
• Yield to maturity (YTM): This represents the estimated return of all securities in the fund if held to maturity. YTM is forward-looking and considered more comprehensive than other metrics.
• Yield to worst (YTW): This measures the lowest potential yield that can be received on the bond of bond funds without issuers defaulting on payments. It accounts for bond provisions that allow the issuer to close out the position before maturity and provides a scenario analysis tool.

YTM “is going to be the most useful of all the metrics you’re going to see,” Lazaroff says. “What makes the yield to maturity great is that it’s forward-looking,” unlike other metrics that only tell you about past performance.

If you’re assessing your worst-case scenario when investing, Lazaroff suggests you look for the YTW. “It’s great for scenario analysis that you can do easily on your own because it’s measuring the lowest potential yield that can be received from the bond fund without issuers defaulting,” he says.

Pros

• Regular income generation

• Less risk than equity funds

• Diversified fixed-income holdings

• May have lower investment minimums than individual bonds

Cons

• Lower potential return compared with equity funds

• Interest rate risk

• Credit risk

• No control over the fund’s portfolio

Key Differences Between Equity and Income Funds

While, as Lazaroff notes, it’s truer every day that investors are putting their money into funds with many gradations between those simply in equities and those in bonds, it’s helpful to set out their major differences.

Equity vs. Income Funds
	Equity Funds	Income Funds
Primary Objective	Capital appreciation	Regular income generation; balancing portfolio risk
Investment Focus	Stocks of various companies	Fixed-income securities (bonds, Treasurys, preferreds, money market)
Comparative Risk Profile	Higher	Lower
Return Potential	Higher over the long term	Lower, mainly from interest income
Market Sensitivity	Exposed to stock market fluctuations and economic conditions	Sensitive to interest rate changes and credit quality
Portfolio Diversification	Diversified across various stocks, sectors, and market caps	Diversified across fixed-income securities with varying maturities and credit qualities
Income Generation	Dividends from stocks (not guaranteed); increase in stock value	Regular interest payments from fixed-income securities
Capital Preservation	No guarantee of capital preservation because of market risk	Aims to preserve capital through principal return at maturity
Liquidity	Generally high liquidity	Generally high liquidity, but may depend on the fund and market conditions
Investor Risk Tolerance	Suitable for investors with higher risk tolerance	Suitable for investors with low to moderate risk tolerance
Fees and Expenses	Higher fees for actively managed funds, lower for index funds	Generally lower fees compared with actively managed equity funds
Taxation	Capital gains tax on profits, dividend tax on distributions	Taxed as ordinary income

Tax Implications of Equity vs. Income Funds

Lazaroff says investors should review how equity and income funds might be treated on their taxes, which can make a major difference in how they invest.

Equity funds: Since equity funds are primarily invested in stocks, they are subject to capital gains taxes. When an equity fund sells a stock at a profit, it’s passed on to investors as capital gains distributions. These are taxed at the long-term capital gains rate if the stock is held for more than a year, which is generally lower than the ordinary income tax rate you pay annually. However, if the stock was held for a shorter period, the gains are considered short-term and are taxed at the investor’s ordinary income tax rate. Dividends passed on to investors are taxed at the qualified dividend rate, usually lower than the ordinary income tax rate.

Income funds: Meanwhile, the interest income generated by bonds is typically taxed at the investor’s ordinary income tax rate. Nevertheless, certain types of bonds, such as municipal bonds, may offer tax-exempt interest income, making them attractive for investors in higher tax brackets. As such, there could be a big difference between one bond income fund and another. In addition to interest income, income funds can also generate capital gains from the sale of bonds, which are taxed like sales in equity funds, and the rate again depends on the holding period.

Who Is an Income Fund Most Suitable for?

Income funds prioritize current income over capital gains or price appreciation through interest or dividend-paying investments. Therefore, they are usually best suited for lower-risk investors who need income flows. These may include older individuals who need retirement income or those who live on fixed incomes and cannot risk stock market volatility.

Is a Bond Fund the Same as an Income Fund?

Not necessarily. While both may invest in a portfolio of bonds, an income fund’s goal is primarily to generate current income, while a bond fund, more broadly, may also seek capital returns by finding underpriced bonds, speculating on interest rate changes, or trading spreads between specific categories of bonds.

What Role Do Equity Funds and Income Funds Play in Retirement Planning?

Both equity funds and income funds can play important roles in retirement planning. Younger investors with longer time horizons are often advised to allocate a larger part of their retirement portfolio to equity funds to benefit from their long-term growth potential. As investors approach retirement age, they may gradually shift their asset allocation toward income funds to prioritize capital preservation and regular income generation. In retirement, income funds can provide a steady income stream to supplement other sources such as pensions or Social Security benefits.

Can an Investor Hold Both Equity Funds and Income Funds?

Of course. Investors frequently hold both equity and fixed-income investments in their portfolios in different proportions to achieve diversification and balance risk and return. This strategy, known as asset allocation, can help optimize a portfolio’s performance by combining the growth potential of equity funds with the stable income generation of income funds.

How Do Equity Funds vs. Income Funds Perform During Recessions?

Equity funds, which are more sensitive to market conditions, may experience significant declines during recessions as company earnings and stock prices fall. While generally more stable than equity funds, income funds may also face challenges during recessions. If interest rates are lowered to stimulate the economy, then the value of bond holdings may rise, but the income flows generated by income funds may decrease at the same time.

The Bottom Line

Equity funds and income funds cater to different investment goals and risk tolerances. Equity funds invest in publicly traded corporation shares and are more suitable for investors seeking capital appreciation and willing to accept higher risk. Income funds hold fixed-income securities like bonds and are often more appropriate for investors prioritizing regular income and capital preservation.

Lazaroff suggests reviewing potential total returns for either kind of fund rather than just looking at dividends or interest income. “A dollar is a dollar, no matter where it comes from,” he says.

Most importantly, ensure that any investment meets your financial goals, risk tolerance, and investment horizon.

How to calculate what you owe the federal and state governments

Reviewed by Lea D. Uradu
Fact checked by Suzanne Kvilhaug

Payroll taxes are federal and state taxes on the taxable income of employees that employers must withhold from paychecks and pass on to the proper tax authorities.

One of the many issues that small business owners must contend with is meeting their payroll tax obligations.

While business owners often hire an accountant or other tax professional to deal with these matters for them, having a basic understanding of the tax system can head off a lot of problems. That’s especially true with payroll taxes.

Here is what you need to know.

Key Takeaways

• Payroll taxes typically include federal taxes, state and local income taxes, FICA taxes (for Medicare and Social Security), and FUTA taxes (for unemployment insurance).
• Some states also have disability insurance taxes and paid family and medical leave taxes.
• Employers must be aware of and meet the various tax deadlines to avoid penalties.
• To calculate payroll taxes, employers must determine which workers are taxable employees and which, if any, are independent contractors.
• Then employers must determine taxable wages and calculate the amount of money to withhold.

What Are Payroll Tax Obligations?

Any business with employees must withhold applicable federal, state, and local taxes from its employees’ paychecks.

The taxes typically withheld are FICA (Medicare and Social Security) taxes and federal, state, and local income taxes, if applicable.

In addition to these, other withholding obligations can include:

• Disability insurance taxes in California, Hawaii, New Jersey, New York, and Rhode Island
• Paid family and medical leave (PFML) taxes in California, Colorado, Connecticut, the District of Columbia, Massachusetts, New Hampshire, New Jersey, New York, Oregon, Rhode Island, Vermont, and Washington
• FUTA (Federal Unemployment Tax Act) taxes

Failure to pay these taxes or to meet the payment deadlines can result in fines and penalties. So it’s important to correctly calculate the amount that’s owed and to pay it on time.

These rules apply to a business owner’s paychecks as well if the business isn’t incorporated and there are no employees.

The owner is essentially the sole employee of the business in this situation. The owner must pay also estimated taxes on their self-employment income each quarter.

Note

Federal tax payments must be made online through the Electronic Federal Tax Payment System (EFTPS).

Steps To Calculate Payroll Taxes

There are three steps involved in calculating payroll taxes.

1. Identify Taxable Workers

Workers can be employees or independent contractors. Employees are treated as taxable workers subject to payroll taxes. Independent contractors are responsible for paying their own taxes.

Workers are usually not considered to be employees if they have the right to direct and control when they work and how they do their work.

But the lines between independent contractors and employees are not always that clear-cut. These are some of the tests that can identify employees:

The Behavioral Test

A worker is an employee if the employer has the right to direct and control their work. The employer doesn’t have to actually direct or control the worker but has the right to do so.

The Financial Test

This test assesses the degree of control an employer has over the financial aspects of a job. In some professions, a worker with significant control over the supplies used for their work is an independent contractor.

Another way to distinguish an independent contractor from an employee is by the availability of their services. An independent contractor isn’t tied to one company and can advertise their services and work to others.

An employee can’t do this unless they’re also working outside the company as an independent contractor for another business.

The Relationship Test

This test refers to the way the employer and the worker perceive their relationships.

The worker is an independent contractor if the employer/worker relationship is expected to last only until the end of a certain project or for a specified period.

The worker is a taxable employee if the relationship has no such boundaries.

2. Determine Taxable Wages

Taxable wages are compensation for services performed. They can include salary, bonuses, and gifts.

Some forms of compensation, such as business expense reimbursements for travel or meals, don’t qualify as taxable wages.

Employees must verify expenses with receipts or expense reports for them to be nontaxable. The expenses must also be ordinary, necessary, and business-related.

3. Calculate Withholding

After you’ve figured out which workers qualify as taxable employees and which payments to them are taxable wages, the next step is to determine what you must withhold for federal, state, and local taxes, as well as for FICA and FUTA.

Federal Income Taxes

Every paycheck must have withheld from it federal income tax for the applicable period. The IRS has two sets of tax tables that employers can use to calculate withholding amounts: wage bracket tables and percentage tables.

It’s your responsibility as a business owner to determine which set is appropriate for your business.

Using the wage bracket tables is generally easier, although the percentage tables accommodate more payroll periods (from daily to semiannually).

Percentage tables also allow for the calculation of tax withholding for employees whose incomes are higher than those reflected in the wage bracket tables.

FICA Taxes

The Federal Insurance Contributions Act (FICA) is the federal law that requires employers to withhold Social Security and Medicare taxes from wages paid to employees.

It also requires that the employer and employee each pay half of the FICA tax. (If you’re self-employed you pay both halves.)

Social Security and Medicare taxes on an employee’s income are imposed on both the employee and employer at a flat rate of 6.2% each for Social Security and 1.45% each for Medicare. This creates a combined FICA tax rate of 15.3%: 12.4% for Social Security and 2.9% for Medicare.

FICA taxes are unaffected by the number of withholding allowances claimed by an employee, unlike federal and state taxes.

(Withholding allowances were made irrelevant by the Tax Cuts and Jobs Act of 2017 but may regain importance if Congress doesn’t act in 2025 to continue the tax cuts.)

You simply multiply an employee’s gross wage payment by the applicable tax percentage to determine how much you must withhold and how much you must pay as the employer.

The Social Security tax applies only to $176,100 of income in 2025. This cap is referred to as the Social Security wage base and it’s adjusted every year for inflation. The Medicare tax doesn’t have an income limit.

FUTA Taxes

Federal unemployment taxes (FUTA) are paid solely by the employer. You must pay unemployment taxes if either of the following situations applies:

• You pay wages totaling at least $1,500 in any calendar quarter, or
• You have at least one employee on any given day for 20 weeks in a calendar year, regardless of whether the weeks are consecutive. The employee can be full-time, part-time, or temporary.

The FUTA tax rate is 6.0% and it’s imposed on the first $7,000 of wages for each employee. However, you can claim credits against your gross FUTA tax to reflect the state unemployment taxes that you pay.

You’re allowed to claim a 5.4% credit that effectively reduces your FUTA tax rate to 0.6% if you pay your state unemployment taxes when they’re due.

State Taxes

Most states use tables similar to the federal tax tables and you can find them on the website of your state’s tax or revenue department.

You don’t have to withhold state taxes in states that don’t impose taxes on income: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming.

Warning

Failing to deposit federal tax withholdings on time can result in penalties of up to 15%.

What Are Payroll Taxes?

Payroll taxes consist of income taxes (federal, state, and sometimes local) and FICA taxes (Social Security and Medicare). Payroll taxes can also include other taxes, depending on the state and local jurisdiction.

What Is the Difference Between Payroll Tax and Income Tax?

Payroll tax refers to various taxes that are withheld from an individual’s paycheck by their employer. That definition often includes income taxes, although the term is sometimes limited just to FICA taxes for Social Security and Medicare.

Do You Pay Payroll Taxes on All Income?

No, you don’t. Payroll taxes include the Social Security tax and Medicare tax, and there’s an income cap on the Social Security tax. The cap is $176,100 in 2025. Income earned above this amount is not taxed for Social Security purposes. The Medicare tax, however, has no cap.

The Bottom Line

Employers face a series of tax deadlines throughout the year. Knowing them and paying on time can prevent the levying of penalties and late fees.

For example, federal income and FICA taxes must be paid semi-monthly or monthly. The IRS usually sends business owners a notice at the end of each year indicating which method they should use for the upcoming year. FUTA taxes usually must be paid quarterly.

Fact checked by Yarilet Perez
Reviewed by Margaret James

Buying a home is often the largest purchase you’ll make in your lifetime and comes with a long-term financial commitment. For many years, you’ll owe monthly loan payments as well as homeowners insurance and property taxes, depending on the terms of the loan and the state in which you reside.

The mortgage lender charges interest for a home loan, which is embedded in your payment. The total interest cost of a mortgage can inflate the cost of buying a home by tens of thousands of dollars over the years.

Paying off your mortgage early offers many benefits, including improving your monthly budget since you will no longer have a mortgage payment. Repaying your mortgage also provides financial security and flexibility, which can help if you lose your job or experience a loss of income.

However, there are drawbacks to repaying your mortgage early, including the opportunity cost of putting that money to use elsewhere. Discover the pros and cons of repaying your mortgage loan and tips on how to do it.

Key Takeaways

• Paying off your mortgage early can save you tens of thousands of dollars in interest.
• Paying off your mortgage early provides peace of mind since you own your home free and clear.
• A smaller monthly cash outlay helps alleviate concerns about unemployment or underemployment.

Paying Off Your Mortgage Early: The Pros and Cons

Paying off your mortgage can provide financial benefits, but there are other factors to consider before committing a significant amount of funds to becoming mortgage-free.

Pros

The first and most obvious benefit to paying off your mortgage early is that you can save tens of thousands of dollars in interest. Review your loan documents from when you bought the home since they should include a payment or amortization schedule, showing the principal and interest breakdown and the total interest cost.

Mortgage lenders disclose up front that you will pay more than the purchase price of the home before you actually own it. In some cases, the total interest cost can add up to an amount that is near or exceeds the original loan amount. Even shaving off several years of a mortgage by paying it down can save you thousands of dollars.

Another benefit to paying off your mortgage early is the peace of mind you gain from owning your home outright. You’ll have a lower monthly cash outlay, which allows you to put that money into savings, make purchases, and lower your financial stress in case of unemployment or underemployment. Alternatively, you can now afford to take a job that pays less than your previous position without any concerns about the lender repossessing your home through foreclosure due to nonpayment of the loan.

Paying off your mortgage provides a return on your investment if the home increases in market value over time. Also, if you’re worried about the cost of future home repairs, you have the financial flexibility of tapping into your home’s equity.

With a home equity loan or home equity line of credit (HELOC), you can take out a much lower amount than the original mortgage. Also, since a HELOC is a line of credit, you don’t need to make a payment unless you borrow, meaning you can have the HELOC remain open in case you need it for emergencies.

Cons

Some argue that paying off your mortgage is a bad financial move. They claim that you will get a higher return, in the long run, if you invest your money instead of making extra mortgage payments. While there is some chance that you will achieve such a feat, there’s also a chance that you won’t.

You’ll need to weigh the benefits of guaranteed savings in mortgage interest with the possibility of achieving a higher rate of return in the markets. However, there are risks associated with investing that can lead to losing all or a portion of the money you invested.

Of course, most people buy a home so they have a place in which to live. Even if it doubles or triples in value, they aren’t likely to sell it unless they downsize. Since you can’t live in a mutual fund, most home shoppers don’t make their purchase in an effort to beat the return of the S&P 500.

The next argument against paying off your mortgage is that you’ll lose the tax break from deducting mortgage interest. While technically this is true and you spend $1 in interest to get a 25- or 35-cent tax break, it only works if you a) itemize deductions and b) are in the highest income tax brackets.

For the average person, you’re likely to have a standard deduction allowed by the IRS, which reduces your taxable income. This tax break can offset some or all of the loss of the tax benefits from the mortgage interest deduction. Please consult a tax professional to determine the best tax strategy for you before paying off your mortgage.

Plan Before You Buy 

Look before you leap and do the math in advance to determine how much house you can afford. One strategy is to buy less house than you can afford to ensure that you have adequate cash flow to make extra mortgage payments.

Also, it provides some cushion should you have to take a lower-paying job in the future. Also, check to ensure that your mortgage does not impose a penalty for prepayment, which can put a damper on your efforts to get out of debt.

Next, be aware of the loan’s financing terms since there are many types of mortgage products. For example, adjustable-rate mortgages (ARMs) offer lower initial payments, but the interest rate can reset higher later in the loan term. ARMs have been used to help buyers get into homes they cannot actually afford and when interest rates rise, some homeowners are caught unprepared.

Similarly, homebuyers often plan their finances based on the idea that their mortgage payments won’t change. This isn’t always true since your local government can raise your real estate taxes. If you want predictability, a fixed-rate mortgage provides a steady mortgage payment and interest rate and can be refinanced if rates fall.

Warning

Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report, either to the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development (HUD).

How to Pay Off a Mortgage Quickly

Strategies for paying off your mortgage early include making bimonthly payments, which results in one extra payment per year. It’s a great strategy, unless there is a fee associated with it. If there is, you can simply set aside some cash and make an extra payment on your own.

If your career advances over the years, put those raises and bonuses to work by sending them to the mortgage company. You were doing just fine without that money, and you won’t miss it if you don’t get used to having it in your budget.

Keep an eye on interest rates and, if they fall, consider refinancing. If you can reduce your interest rate, shorten the term of your loan, or both, refinancing can be an excellent strategy. Just don’t make the mistake of keeping your term the same and taking money out.

A mortgage calculator is a good resource for comparing these costs.

Are There Tax Advantages to Paying Off Your Mortgage Early?

Typically, borrowers can or get a tax deduction for the amount of mortgage interest paid each year on their loan. If you pay off your mortgage early, you lose this tax deduction, which can increase your overall tax liability.

However, most taxpayers can take the standard deduction offered by the Internal Revenue Service (IRS). So, losing the mortgage interest tax deduction may not impact your overall tax liability. Please consult a tax professional before paying off your mortgage to discuss the financial and tax implications.

What Is the 2% Rule for Mortgage Payoff?

The 2% rule for a mortgage payoff involves refinancing your mortgage. Refinancing is when you take out a new loan to pay off your existing loan—ideally at a lower interest rate.

The 2% rule states that you should aim for a new refinanced rate that is 2% lower than your current rate on the existing mortgage. In this way, you save enough money in the long term to offset the cost of refinancing, which can include fees and closing costs.

Do Your Property Taxes Decrease When You Pay Off Your Mortgage?

Whether or not you have a mortgage loan has no impact on the cost of your property taxes. Typically, your property taxes are calculated based on the home’s value and the square footage of your property. In other words, your state or local government determines the value of your property through its tax assessment process.

The Bottom Line

There’s no time like now to begin assessing whether to pay off your mortgage early. Start by reviewing your amortization schedule and the total interest cost of the loan. Check your finances to determine whether you can afford to make extra payments. If you can, every extra dollar you send to the lender reduces the total interest. Ideally, at some point, you’ll find the comforts of home are even more pleasurable when it is you, not the bank, who owns your home.

Fact checked by Suzanne Kvilhaug

Free cash flow (FCF) is the amount of cash a business has leftover after paying for all of its expenses, showing its ability to generate cash beyond its operational needs. This determines whether a business can expand, pay dividends, pay down debt, and survive economic downturns. FCF also helps investors and analysts gauge profitability, efficiency, and long-term prospects.

Key Takeaways

• Free cash flow shows how much cash a company has left over after paying for expenses, making it an indicator of financial health.
• A positive FCF means a company can invest, pay dividends, or reduce debt. A negative FCF isn’t always bad; startups commonly spend more than they earn early on.
• FCF can be calculated using either operating cash flow (which accounts for working capital changes) or net income (which requires adjustments for working capital and non-cash expenses).
• Investors and analysts use FCF to assess company value and long-term stability, as it reflects actual cash available better than earnings.

What Is Free Cash Flow?

Free cash flow is how much cash a company has after paying all cash outflows related to operating the business and maintaining capital assets. Businesses incur expenses just for operating, including rent, salaries, office supplies, utilities, insurance premiums, and so on. They also have capital expenditures, such as needing to buy new equipment.

The cash left after covering all of these expenses is free cash flow. A positive cash flow shows a business earns more than it spends while a negative FCF shows a business spends more than it earns.

With all the expenses paid for, a positive FCF means businesses can use this “extra” cash to invest back in the business, pay dividends to shareholders, or pay back creditors to manage their debt better.

Calculating Free Cash Flow

There are two primary ways of calculating free cash flow: (1) using operating cash flow and (2) using net income.

Using Operating Cash Flow

Calculating free cash flow from operating cash flow involves subtracting capital expenditures from operating cash flow. Operating cash flow is part of a company’s cash flow statement and details the cash generated from a business’s core operations. Capital expenditure is the money a business spends on machinery, equipment, and infrastructure.

The formula is:

Free Cash Flow = Operating Cash Flow – Capital Expenditures

Operating cash flow and capital expenditures can be found on the cash flow statement of a company.

For example, say a company had an operating cash flow of $250,000 and capital expenditures of $100,000. The company would have a free cash flow of $150,000.

FCF = 250,000 – 100,000 = 150,000.

This $150,000 could be used to invest back in the business, pay dividends to shareholders, or pay down outstanding debt.

Using Net Income

Calculating free cash flow from net income involves adjusting for non-cash expenses and working capital changes.

The formula is:

Free Cash Flow = Net Income + Non-Cash Expenses – Changes in Working Capital – Capital Expenditures

Non-cash expenses are depreciation and amortization, which reduce net income but do not impact cash flow. Working capital adjustments take into consideration changes in accounts receivable, inventory, and accounts payable.

For example, assume a company had net income for the period of $200,000, depreciation and amortization of $25,000, working capital changes of -$25,000, and capital expenditures of $100,000. Its free cash flow would be $150,000.

FCF = 200,000 + 25,000 – (-25,000) – 100,000 = 150,000

Both methods of calculating free cash flow result in the same number.

Note

Companies with a high FCF can be attractive targets for acquisition as their high cash position lessens the need for debt financing in a buyout.

Importance of Free Cash Flow

As noted, free cash flow is one of the most important indicators of a company’s health. FCF tells you exactly how much cash a company generates, unlike earnings, which can be altered depending on accounting rules and non-cash items.

As with personal finances, free cash flow means more financial freedom and flexibility for a company. A company with a positive FCF can invest in new ventures, acquire other companies, expand its operations, or improve the quality of its core offerings.

It can also help carry a company through tough markets without having to rely on debt financing, which can cause a strain on company finances.

FCF is an important number for investors. Companies with high FCFs can return value to shareholders via dividends or stock buybacks. Low or declining FCF indicates the opposite; financial struggles.

Analysts also pay close attention to FCF for valuation modeling. The metric is used in discounted cash flow (DCF) models to determine the intrinsic value of a company, shedding more light than net income on the worth of a company because it shows actual available cash.

What Free Cash Flow Can Tell You

While a positive free cash flow underscores financial health, with the ability to pay dividends or expand the business, a negative free cash flow doesn’t always signal a company in trouble.

Startups or high-growth companies often spend heavily on product development, marketing, hiring, and building out operations before generating revenue. Startups are often spending much more cash than they are bringing in.

Profitability is often not the primary focus for these new companies; however, constant negative free cash flow without a clear strategy for profitability could be risky.

So while positive FCF indicates a financially healthy and stable company, investors need to understand why a company might have negative FCF. For example, a new company with a negative FCF might be healthier than a mature company with a negative FCF.

A consistently declining FCF may also spell trouble for a company. It could mean decreased profitability, reduced demand, rising costs, or other adverse factors. As with all financial analysis, you need to look at multiple indicators to gauge the true health of a company.

The Bottom Line

Free cash flow is a key financial metric that shows how much cash a company has left over after paying all of its expenses. A positive FCF gives a company flexibility, allowing it to invest in growth, return value to shareholders, or manage debt.

A negative FCF could indicate financial difficulty; however, the context must be understood, as some companies, like startups, are focused on expansion and growth. Investors and analysts rely on FCF to understand financial stability and future prospects, as it provides a clearer picture of financial health than earnings alone.

Reviewed by Marguerita Cheng

A wide range of Social Security benefits is available to U.S. citizens depending upon their circumstances. These benefits include retirement, disability, survivor, and family assistance as well as Supplemental Security Income. Survivor and family benefits for children are taxed similarly.

Key Takeaways

• Social Security survivor benefits paid to children are taxable to the child although most children don’t have enough income to be taxed. 
• Survivor benefits aren’t taxable if they represent the child’s only taxable income. 
• The benefits become taxable if half the child’s benefits plus other income is $25,000 or more as of 2025.
• Parents or guardians who receive retirement benefits on the child’s behalf aren’t responsible for paying taxes on them.

Survivor Benefits vs. Retirement Benefits

Social Security survivor benefits are paid to children whose parent is deceased and who are younger than 18 years old. This extends to 19 years old if they’re enrolled full-time in school. Stepchildren or grandchildren may also qualify for these benefits. Children can receive benefits at any age if they were disabled before they reached age 22 and remain disabled. Children can receive up to 75% of the deceased parent’s benefit.  

Social Security retirement benefits are referred to as Family benefits when they’re paid out to a child after a parent has retired. Spouses, ex-spouses, and grandchildren can be eligible for these benefits as well. They can receive up to 50% of the retiree’s benefit amount.

Taxation of Survivor Benefits

Social Security survivor benefits for children are considered taxable income only for the children who are entitled to receive them. This is the case even if the checks are made out to a parent or guardian. Most children don’t make enough in a year to owe any taxes, however. Survivor benefits are only taxed if half of the child’s benefits in a year added to any other income they earn meets certain thresholds.

A portion of the benefits becomes taxable when half the annual benefits plus the child’s other income exceeds $25,000 in tax years 2024 and 2025.

Most checks for Social Security survivor benefits are made out to an adult on the child’s behalf. The amount of the benefits doesn’t affect the taxable income of the parent, however. The amount designated for the eligible child is subtracted from the check to determine the parent’s tax liability if both the parent and the child receive benefits.

Important

Social Security benefits for children are never treated as taxable income for the parent or guardian.

Taxation of Retirement Benefits

A child who receives retirement benefits based on a parent’s work record may still be considered a dependent for tax purposes. This is the case if they live with the parent for more than half the year and the parent pays for more than half of their living expenses such as food, housing, clothing, education, and medical care.

Parents or guardians are responsible for filing and signing a tax return on the dependent child’s behalf if they’re required to file a return due to receiving Social Security benefits. The income thresholds for required filing are the same as for survivor benefits.

What Are Social Security Benefits?

Social Security benefits are essentially federal insurance benefits. Many people are eligible for these programs including disabled people, older adults with little to no resources, and retirees. Age 62 is the minimum age although there are monetary incentives for waiting longer to collect benefits. Surviving spouses, minor children, and unmarried ex-spouses of beneficiaries who have died may also be eligible.

What Is the Social Security Administration?

The Social Security Administration (SSA) is a federal agency that manages and distributes Social Security benefits. It was launched in 1935 with President Roosevelt’s signing of the Social Security Act and has several programs. It administers benefits for retirees, their survivors, people with disabilities, and older adults with little or no resources.

The SSA also assigns Social Security numbers and enrolls people in Medicare, the federal health insurance program for those who are 65 years old or over.

Are Social Security Benefits for Children Reported to the IRS?

All Social Security benefit payments are reported to the IRS. The recipient of the benefits receives an SSA-1099 form in January that includes the amounts of all benefits received during the previous year.

The Bottom Line

A child who is younger than age 18 or age 19 if they’re enrolled full-time in school can receive Social Security benefits if their parent dies. They can also collect family benefits when their parent retires. The IRS doesn’t treat Social Security benefits for children as income for the parent or recipient who receives the money on behalf of the child.

They’re convenient if you don’t have a bank account, but they can also be costly

Reviewed by Lea D. Uradu
Fact checked by Yarilet Perez

If you’re paying someone to prepare your taxes for you this year and expect a return, they may give you the option of receiving it as a prepaid debit card. While that might seem like a great convenience, some aspects are worth considering, such as hidden or multiple fees or limits.

Learn more about prepaid tax refund debit cards so you can decide whether they are an option for you.

Key Takeaways

• Many tax preparation services allow you to choose to load your tax refund onto a prepaid debit card.
• A prepaid debit card might be useful for someone without a bank account, for convenience, or to expedite their refund.
• Many prepaid tax return debit cards have fees that can reduce how much of your refund you’ll be able to use.

Advantages of Tax Refund Debit Cards

Tax preparation services like H&R Block, Jackson Hewitt, TaxAct, and TurboTax all make prepaid cards available to their customers. Proponents of the cards point to these advantages:

• Useful if you don’t have a bank account
• Helpful if you want your refund a bit sooner
• More convenient than a check

Advantages Explained

If you’ve chosen not to use a bank, you won’t be able to receive your refund via direct deposit, the IRS’ preferred way of sending out refunds. These cards give you an alternate method of receiving your return.

It’s usually faster for the U.S. Treasury Department to deposit your return onto a prepaid debit card than into a bank account or for you to receive a refund check in the mail. According to H&R Block, if you e-file your return, you can typically expect a direct deposit within 21 days, while a check may take 21 to 28 days. If you file a paper tax return, the wait will be longer because of the time involved in processing paper returns.

Checks must be cashed to receive the funds, you’ll need an account at a bank or credit union. These cards remove this need and make it easier to access your return if you get it via check.

If you do have to cash a check and don’t have a relationship with a bank, some big-box stores, like Walmart, and major grocery chains, like Kroger, cash checks for much lower fees, typically less than $10. Payday loan businesses might charge you much more, so it helps to be wary of businesses that might charge too much.

Disadvantages of Tax Refund Debit Cards

If you don’t have a bank account, receiving your refund on a prepaid debit card can be convenient. However, that convenience generally comes with disadvantages:

• High and multiple card use fees
• Risk of loss
• Maximum daily withdrawal limits
• Out of network ATM fees

Disadvantages Explained

Many prepaid tax return debit cards come with multiple fees. For example, H&R Block’s Emerald Prepaid Mastercard charges a $3.50 fee for using the card to get cash at all automated teller machines (ATMs) plus any fees the ATM operator might charge. If you haven’t used your card in more than 60 days, H&R Block will charge you an inactivity fee of $9.95 per month. To check your balance at an ATM, you’ll be charged $1.

TurboTax’s Turbo Prepaid Visa Card charges $4.95 a month unless you’ve loaded at least $1,000 on it in the preceding month (the first monthly fee is waived regardless of the amount); in-network ATM withdrawals are free, but out-of-network ones cost $2.50.

A prepaid tax return debit card might seem convenient, but it is a card that you’ll carry around and be responsible for. If you lose your wallet, the card falls out, or you forget it at a store or restaurant, you might lose what’s left of your tax return—or the entire amount, if you lose the card before you can use it.

The retail giant Target has a reloadable account card into which you can deposit your tax return. In addition to fees, this card has a withdrawal limit of $750 per day. If your tax return exceeds this amount, you’ll need to withdraw it over multiple days and transactions. If you don’t use an Allpoint ATM (in a Target store), you’ll be charged $2.50 plus any ATM operator fees.

Minimizing Prepaid Tax Return Debit Card Fees

There are some things that you can do to minimize your fees. First, check the card agreement to make sure you understand the fee structure. For example, if you have H&R Block’s card, you’ll want to make sure you use it at least once every 60 days to avoid the monthly fees. With the TurboTax card, if you aren’t able to load another $1,000 on it each month (such as through direct deposit of your paycheck), you may want to spend down your balance in as few months as possible.

An even better alternative may be to open a bank or credit union account, even if you previously believed that you didn’t have enough money to be eligible for one. For example, some credit unions, designated as low-income credit unions (LICUs), have low minimum balance requirements, offer check cashing services, and even make small loans.

Can I Get My Tax Refund on a Prepaid Debit Card?

Yes. However, it’s important to be aware of any fees or limitations before agreeing to have your return deposited to a prepaid debit card. Depending on your circumstances, it might be more beneficial to use or open a checking or savings account.

How Do I Get a Tax Refund Debit Card?

Many tax preparers have agreements with financial institutions for tax refund prepaid debit cards. Some retailers, such as Target, offer these cards as well.

Does the IRS Send Refunds on a Debit Card?

The IRS (via the U.S. Treasury) only sends refunds through checks or direct deposit. If you want a prepaid tax refund debit card, you’ll need to use a tax preparer with that service.

The Bottom Line

Receiving your tax refund through a prepaid debit card can be convenient and a little faster than waiting for a check or deposit, and it is an option for people who don’t have a bank account. However, you also may be subject to multiple fees or other limitations, which will whittle away at your refund. If you decide to go this route, be sure to read the card agreement so that you can avoid as many fees as possible.

Fact checked by Timothy Li
Reviewed by Pamela Rodriguez

Special Needs Trust vs. ABLE Account: An Overview

Both ABLE accounts and supplemental needs trust (SNT), also known as supplemental needs trusts, allow the accumulation of resources for the benefit of an individual with a disability without jeopardizing key federally funded benefits, like Supplemental Security Income and Medicaid.

Though both financial tools serve a similar purpose, there are key differences in how they function and their rules regarding contributions, usage of funds, and management.

In this article, we will explore both options and highlight the differences between an ABLE account and an SNT, so you can make an informed decision based on your specific needs.

Key Takeaways

• Both ABLE accounts and SNTs enable individuals with disabilities (or their families) to save money without impacting eligibility for programs like SSI or Medicaid.
• ABLE accounts are easier to set up and manage, but they come with limits on how much money can be contributed each year.
• SNTs do not have contribution limits but can be expensive and more complicated to establish.
• You don’t have to choose one over the other; you can use both an ABLE account for everyday expenses and an SNT for larger expenses that aren’t covered by public benefits.

Supplemental Needs Trusts (SNTs)

A supplemental needs trust (SNT) is a way for an individual with a disability to receive money without losing access to their public benefits.

Most public assistance programs for people with disabilities have income and asset restrictions—if an individual with a disability earns too much or has too much money in savings, they will no longer be eligible for these benefits. An SNT is a way around this restriction. Money put in the trust doesn’t count toward the purpose of qualifying for public assistance.

An SNT is a legal arrangement and fiduciary relationship. In a fiduciary relationship, a person or entity acts on behalf of another person or people to manage assets. An SNT is a popular strategy for those who want to help someone in need without taking the risk that the person will lose their eligibility for programs that require their income or assets to remain below a certain limit.

The individual who creates the trust can rest assured that the money contributed will be used as outlined in the creation of the trust. Furthermore, benefiting both the beneficiary and the trust creator, assets in the trust cannot be claimed by creditors or in the loss of a lawsuit. It’s also important to recognize that the money in an SNT can only be used for healthcare needs, transportation, and other qualifying costs.

Advantages of SNTs

• No contribution limits
• Protects funds from creditors
• Ensures continued eligibility for SSI and Medicaid

Disadvantages of SNTs

• Setting up an SNT can be expensive and complex, often requiring legal assistance.
• Funds must be used for specific, non-basic needs (such as healthcare and therapy) and cannot cover regular living expenses like rent or groceries.

ABLE Accounts

In many ways, an ABLE account is similar to an SNT. An ABLE account is a tax-advantaged savings account available to individuals with significant disabilities that began before the age of 26. Contributions can be made to the account by the beneficiary, friends, or family members, just as with an SNT.

Money saved in an ABLE account doesn’t affect a person’s eligibility for public benefits. There are also tax benefits to setting up an ABLE account—while the contributions themselves are not intended to be tax-deductible, the funds within the account grow tax-free and distributions are tax-free.

ABLE accounts are a much newer financial product than SNTs. They were created by the 2014 Achieving a Better Life Experience (ABLE) Act as a way of giving more people access to the benefits that, up until then, were restricted to those who held SNTs.

ABLE accounts can be used to pay for a wider range of things than the money in an SNT. The money in an ABLE account can be used to pay for any qualified disability expenses (QDEs).

Advantages of ABLE Accounts

• Easier to set up and manage than SNTs.
• Funds grow tax-free, and withdrawals for qualified disability expenses (QDEs) are tax-free as well.
• Can be used for a broader range of expenses than SNTs, including basic living costs like housing and food.

Disadvantages of ABLE Accounts

• Annual contribution limits (currently $19,000 in 2025).
• There are state-specific limits on the total balance that can be held, typically up to $300,000.
• Money left in an ABLE account after the individual’s death may be used to reimburse the state Medicaid agency for services provided.

Note

There is an annual limit to how much you can contribute to an ABLE account: $19,000 in 2025. SNTs have no limits.

Key Differences

There are three main differences between SNTs and ABLE accounts: eligibility, the expenses permitted for each type of account, and the limits on how much money you can save through them.

Eligibility

ABLE accounts are offered to those meeting certain requirements. You only have to meet one of the following:

• Eligible for SSI determined by a disability or blindness that occurred before the age of 26
• Eligible for benefits, including disability insurance benefits, childhood disability benefits, and disabled widow/widower benefits determined by a disability or blindness that occurred before the age of 26
• A certificate proving that your disability or blindness occurred before the age of 26

An individual that qualifies for disability according to the Social Security Administration has to set up a first-party SNT before they reach 65. Third-party trusts, however, have no age restrictions. First-party SNTs are invested with assets that belong to the beneficiary while third-party trusts are invested with assets from anyone but the beneficiary.

Account Limits

ABLE accounts have contribution limits as well as amount limits. You can only contribute a certain amount each year. This amount is set federally under the same tax code governing 529 plans: $19,000 in 2025. In addition, ABLE accounts have a maximum limit set by the state that manages them. Many states set this limit above $300,000, with only the first $100,000 exempt from impacting eligibility for supplemental security income (SSI). SNTs have no such limits.

One disadvantage of SNTs is that they can be expensive to set up. You will typically need to hire an attorney to set up the trust. In contrast, setting up an ABLE account is fast and easy, and can be done directly through the state’s website. No attorney or financial advisor assistance is needed.

Permitted Expenses

The third main difference between these accounts concerns what you can use them to pay for.

Put simply, SNTs are supposed to pay for “extra” things that make life more comfortable, such as vacations, pets, entertainment, home furnishings, assistive technology, therapies not covered by Medicaid, and more. These are things that public benefits cannot pay for. If the money in an SNT is used to pay for basic costs of living, a person’s public benefits might be decreased.

ABLE accounts have a broader range of permitted expenses. This includes anything that helps a person with a disability improve their health, independence, or quality of life. QDEs can include basic costs of living, as well as costs for education, food, employment, transportation, technology, support services, and more.

Other Differences

As well as the fundamental differences mentioned above, these accounts differ in several other ways. These features may make a big difference to you, depending on your situation.

• Everyday management: In general, money in SNTs is more difficult to access. The funds in ABLE accounts can be accessed easily, and many programs offer a debit card that allows you to pay for items directly from the account.
• Who manages the account: ABLE accounts are owned and managed by a person with disabilities, who is responsible for making sure that they only spend money on allowable expenses. SNTs are managed by trustees, who are responsible for keeping records of expenses.
• Tax: The money you keep in an ABLE account is tax-free, but the money kept in an SNT is taxable each year.
• Medicaid liability: Money left in a person’s ABLE account after they die may be used to reimburse the state Medicaid agency for services Medicaid paid for after the ABLE account was created, depending on state regulations. There is often no money left after Medicaid is paid back. SNTs that were created with a parent, grandparent, or other person’s money (known as a third-party trust) do not have to repay Medicaid after a person dies.

SNT vs. ABLE Account: Which Is Better?

Every family’s needs and circumstances are different, and when making financial decisions it’s best to consult a professional. You can find lists of financial professionals who work with people with disabilities online, and the ABLE National Resource Center provides a comparison tool to help you understand how each type of account can help you.

It’s also important to realize that you don’t need to choose between an ABLE account and an SNT. You can in fact have both. These accounts are best used for different purposes, despite having some characteristics in common.

Important

The money in SNTs is to pay for “extra” expenses that are not covered by public benefits. You can use the money in an ABLE account for a much broader range of expenses, including the basic costs of living, education, food, employment, and transportation.

You should set up an ABLE account if you or a family member qualify. This will ensure that the individual with disabilities, whether you or a family member, will be able to obtain benefits. There may be additional benefits as well, such as tax relief.

There are many factors to consider when choosing the best option for your family, points out Juliana Crist, senior consultant at AKF Consulting, a municipal advisor to state-run investment plans. “Things like guardianship orders, end-of-life planning, tax considerations, Medicaid payback, and total assets all play into the decision of which financial tool to use,” Crist says. Her firm, she continues, “always likes to say that SNTs and ABLE accounts are complementary tools—they work very well together.“

Establishing an SNT is strategically viable if you need to sequester more money than an ABLE account allows, which is up to $100,000. If you put in more than $100,000, then SSI benefits will be suspended.

Can I Have an SNT and an ABLE Account?

Yes, you can have both. And you can even set up an SNT so that it can fund an ABLE account.

Who Controls an SNT?

The most common type of SNT is a third-party trust set up by parents to benefit their children. In this case, the parents act as trustees. A trustee is a person or entity who manages the trust assets and administers the trust provisions.

Does Autism Qualify for an ABLE Account?

Yes, autism is a disability that qualifies for an ABLE account. The Internal Revenue Service lists the disabilities that qualify, which the Social Security Administration will accept for SSI or SSDI.

The Bottom Line

Both ABLE accounts and SNTs allow a person diagnosed with disabilities—or their relatives—to save money without affecting their eligibility for public benefits. Prior to 2014, only SNTs could be used for this purpose, and they can be expensive to establish.

ABLE accounts are much easier to set up and manage. However, they come with some disadvantages: primarily, limits on the amount of money you can save each year. You don’t have to choose one or the other, though. It’s possible to set up an ABLE account for everyday expenses and have an SNT that you can use for larger purchases that are not covered by public benefits.

The number of women-fronted companies is growing and these are at the head of the pack

Fact checked by Vikki Velasquez

Women-owned companies in the U.S. are growing at more than double the rate of other firms. These companies contribute nearly $3 trillion to the economy with direct responsibility for 23 million jobs.

There are more opportunities to add their businesses to your stock portfolio as women gain a bigger stake in the corporate world.

Key Takeaways

• Women-owned businesses contribute nearly $3 trillion to the U.S. economy and are responsible for 23 million jobs.
• Women hold just 15% of the Fortune 500 CEO positions but they make up more than half of the U.S. population.
• Having more women on the boards of companies translates to less excessive risk-taking and improves companies’ reputations, earning quality, and sustainability performance.
• Investing in women-owned and -run businesses can help increase diversity and inclusion in American corporations.

Reasons to Invest in Women-Owned/Led Businesses

Many everyday investors want to put their money into businesses that align with their values whether that’s environmental, social, and governance (ESG) investing or female- or minority-owned companies. Investing in women-owned businesses can make a difference in increasing diversity and representation in corporate America.

Women make up more than half of the U.S. population but held just 10.4% of CEO positions at Fortune 500 companies as of February 2025. Only 6.1% of chief executives in the country were Black in 2024 despite making up approximately 13.7% of the population.

Women-founded companies received only a tiny 1.0% slice of total venture capital funding in the U.S. in 2025.

Boston Consulting Group study found that startups founded and cofounded by women performed better over time than those founded by men. They generated 10% more in cumulative revenue over five years.

Note

Having more women on the board of a company tends to mean less excessive risk-taking as well as improved firm reputation, earnings quality, and sustainability performance, according to S&P Global.

Top Women-Owned and Women-Run Businesses

1. Arista Networks

Arista Networks (ANET) leads the industry in cloud-to-client networking for large data centers and campus and routing environments. The company serves more than 10,000 cloud customers including global Fortune 500 companies. CEO Jayshree Ullal led the company to a historic multibillion-dollar IPO in June 2014.

The company continues to expand at a blistering pace under her leadership. Earnings growth is an important metric to consider when valuing a stock and it looks extremely promising for Arista with a 27% growth rate from 2018 through 2023. Return on equity (ROE) for shareholders was at an impressive 29% in 2023.

2. Chart Industries

CEO Jillian Evanko leads Chart Industries (GTLS), a top manufacturer of cryogenic gas processing and storage equipment. Evanko took charge in 2018 after serving as CFO and chief accounting officer which is particularly significant for a company that heavily relies on acquisitions.

Chart’s stock has doubled since 2019 thanks to solid financial expertise and leadership, Evanko attributes the company’s success in large part to their market dominance and high demand for services. Chart acquired Howden in 2022, a company larger than Chart in terms of revenues.

3. The Hershey Company

Hershey (HSY), the confectionery giant, has proved to be a delectable investment under the leadership of CEO Michele Buck. A stalwart at the company since 2005, Buck took over as CEO and board chair in March 2018. She served 17 years at Kraft/Nabisco in numerous senior positions and at the Frito-Lay division of PepsiCo before joining Hershey in 2005.

Her extensive experience in consumer packaged goods has paid off for the company. Hershey’s stock has nearly tripled since Buck joined the executive team in 2016, reaching a high of $274.04 in May 2023 although it’s at $179.54 in mid-March of 2025. The stock has nonetheless seen sustained growth as the company has cemented its position in the market through over 20 acquisitions. 

4. Progressive Corp

Progressive was already known as a giant in the insurance field but its status has grown since Tricia Griffith took charge. Griffith joined the company over 35 years ago and worked her way up through several leadership positions before becoming CEO in 2016.

The company trades under Progressive Corp (PGR) and its stock has a five-year price total return of 295.21% as of March 2025. Progressive stock and revenue performance has held strong through economic turmoil and market uncertainty perhaps thanks to its product being a basic need. The company’s annual revenue for 2023 was $75.34B as of March 2025.

5. Zoetis

Zoetis (ZTS) was once part of Pfizer. It’s a leading animal health company that produces medicines, vaccines, and diagnostics. CEO Kristin Peck played a pivotal role in Zoetis’ 2013 IPO and has led the company since 2020. She was been recognized by Barron’s as one of the top CEOs in 2022 and by Fortune as a 2020 Businessperson of the Year.

Global trends favor Zoetis based on increased spending on livestock healthcare and growing pet ownership. Zoetis delivered a solid 35% in total returns under Peck’s leadership, exceeding the 26% S&P 500 returns for 2023. Returns have dropped in 2024 and 2025, however.

Earnings per share, a key management metric, have grown consistently since 2011 with a 7.89% increase year-over-year for the quarter ending Dec. 31, 2024. 

6. Sunrun

Sunrun (RUN) is the nation’s leading home solar, battery storage, and energy services company and it’s both women-led and co-founded. CEO Mary Powell has run the company since August 2021. Co-founder and co-executive chair Lynn Jurich held the top position before that.

There are compelling financial reasons to invest in Sunrun beyond feeling good about supporting sustainable energy. The stock has seen some volatility but analysts remain bullish on this buy. The stock crossed above its 200-day moving average of $16.24 in December 2023 with some trades going as high as $18.54 per share. The 200-day moving average is an important indicator for investors who are looking to spot mid- and long-term trends.

7. Accenture

Accenture (ACN) has been led by CEO Julie Sweet since 2019. It’s a global IT services giant excelling in consulting and outsourcing. Accenture challenges smaller firms in innovation and expertise with a vast workforce and numerous diamond accounts,

The company benefits from the pairing of a solid reputation and steady, sustainable growth. It’s built a considerable economic moat with more than $66.3 billion in revenue as of March 2025 and a client list that includes more than 75% of the global top 500 companies. 

8. Eventbrite

Co-founder and CEO Julia Hartz leads vision, strategy, and growth at Eventbrite (EB), the world’s largest ticketing and event technology platform. Eventbrite attributes its success to her leadership under which the company has received several awards including Fortune’s 100 Best Workplaces in the U.S., Glassdoor’s Employees’ Choice Best Places to Work, and San Francisco Business Times’ Best Places to Work in the SF Bay Area.

Hartz has been honored as one of Inc.’s Female Founders 100, Fortune’s 40 Under 40 business leaders, Inc.’s 35 Under 35, and Fortune’s Most Powerful Women Entrepreneurs.

9. Veracyte

Veracyte (VCYT) founder Bonnie Anderson served as CEO from 2008 to 2016 before passing on the executive role to Marc Stapley. She remains active in the company via an executive chairman role. 

The global diagnostics company provides clinicians with insights and testing to help diagnose and treat cancer. The company boasts steady stock performance as well as revenue, income, and profit margins rising by 23.5%, 132.4%, and 126.3% respectively from 2023 through 2024.

What Qualifies As a Woman-Owned Business?

Qualifying for the Women-Owned Small Business (WOSB) Federal Contract program requires that a business must be at least 51% owned and controlled by women who are U.S. citizens. Women also must manage day-to-day operations and make long-term decisions.

Companies that meet this requirement can also apply for certification as a woman-owned business. Getting certified isn’t required but it entitles firms to federal contracts and economic resources.

How Do I Start Investing in Women-Owned Businesses?

The first step in adding women-owned or women-led businesses to your portfolio is to identify the companies you’re interested in. You should then track their performance, including stock activity, financial health, and any relevant news or events. You might also look at financial statements, earnings reports, and other relevant data. 

You can work with your brokerage platform or financial advisor to make a purchase if you’re ready to buy. You’ll have to specify the number of shares you want to purchase and the type of order you want such as a market order or a limit order.

Can I Invest Without Choosing Particular Companies?

You could invest in an exchange-traded fund (ETF) that focuses on or includes female-owned companies instead of handpicking individual companies to invest in. An ETF contains multiple companies and may include a mixture of investment types like stocks, commodities, and bonds.

The Bottom Line

Buying stock in successful, women-led public companies presents an opportunity for everyday investors and for the companies they invest in. It contributes to more diversity and gender equality in corporate leadership.

Research suggests that businesses with diverse leadership may exhibit better long-term financial results. Be sure to research the company, including stock and overall financial performance before making any investment.

Disclosure: Investopedia does not provide investment advice. Investors should consider their risk tolerance and investment objectives before making investment decisions.