Diffusion models have demonstrated strong potential in language modeling, offering various advantages over traditional autoregressive approaches. Their ability to generate and revise entire responses in parallel enables faster generation and built-in self-correction mechanisms. Most modern diffusion-based language models employ masked diffusion, where decoding involves iteratively processing masked tokens based on a binary decision: either retaining the mask or replacing it with the predicted token. However, this binary choice discards valuable predictive information when the mask is retained. To address this limitation, we introduce soft-masking (SM), a novel method that dynamically blends the embedding of the mask token with the embeddings of the top-k predicted tokens from the previous decoding step, for each retained mask. This provides the model with a more informative prior, preserving context from earlier computations and allowing partial information about masked tokens to propagate beyond a single step. We propose a training methodology that efficiently adapts masked diffusion language models to incorporate SM. We demonstrate that training a 169M parameter model from scratch with SM yields superior perplexity and MAUVE scores compared to binary masking baselines. Similarly, a pretrained model can be enhanced with SM through continued pretraining. Finally, we finetune two state-of-the-art diffusion models, Dream-7B and Dream-Coder-7B, with SM. SM consistently improves performance across multiple coding benchmarks, particularly in high-throughput settings. The code is available at https://github.com/IBM/soft-masked-diffusion-language-models.