If you’ve poured cash into money market mutual funds, you could see a higher 2023 tax bill in April. But other investments could reduce your 2024 taxes, experts say.
Investors and institutions have funneled cash into money market funds amid rising interest rates, and balances reached $5.84 trillion as of Nov. 29, the Investment Company Institute reported. Meanwhile, some of the largest money market funds are now paying close to 5.5%, as of Dec. 4, according to Crane Data.
Money market fund yields are higher than any year since the Great Recession, said certified financial planner Seth Mullikin, founder of Lattice Financial in Charlotte, North Carolina. “For most investors, this will be taxable income,” he said.
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Investors typically owe regular income taxes on earnings from money market mutual funds or high-yield savings accounts, with top marginal rates of 37% for assets held in a brokerage account. By comparison, the highest long-term capital gains rate is 20%.
Plus, boosting your income can have other financial consequences, such as higher premiums for Medicare Part B and D, known as the income-related monthly adjustment amount, or IRMAA, Mullikin said.
“While any additional income earned from higher yields is taxed at a progressively higher rate, IRMAA applies as a surcharge,” he said. “This means that even $1 of additional income could trigger higher premiums.”
However, other investment options could help minimize the tax burden, financial experts say.
Tax-friendly options for cash
If you have a sizable amount of cash, you may consider Treasury bills, according to Catherine Valega, a CFP with Green Bee Advisory in the greater Boston area.
With terms ranging from one month to one year, most Treasury bills, known as T-bills, are currently paying well over 5%, as of Dec. 4. You can buy T-bills through TreasuryDirect or a brokerage account.
However, T-bills offer a tax benefit over products like high-yield savings, certificates of deposit or money market funds: no state or local taxes on earnings. T-bill interest is still subject to federal income taxes.
Another option is tax-exempt municipal money market funds, according to Kirk Hackbarth, a CFP and wealth advisor at JMG Financial Group in Milwaukee. He is also a certified public accountant.
Municipal bonds typically invest in assets issued by municipalities, such as state and local governments, and investors generally avoid federal income taxes on earnings. Some of the biggest tax-exempt money market funds are paying around 3.5%, as of Dec. 4, according to Crane Data.
“Investors in a higher marginal income tax bracket should consider municipal money market mutual funds,” Hackbarth said. “The after-tax yield can be higher.”
However, the best option for cash ultimately depends on your risk tolerance and goals, experts say.
https://www.cnbc.com/2023/12/04/heres-where-to-invest-your-cash-to-save-on-taxes-in-2024.html