Here’s where to invest your cash to save on taxes in 2024: In April 2023, if you have invested heavily in money market mutual funds, your tax liability may increase. However, other investments may minimize your taxes in 2024, according to experts.
In response to rising interest rates, investors and institutions have poured cash into money market funds; as of November 29, balances had reached $5.84 trillion, according to the Investment Company Institute. According to Crane Data, as of December 4, some of the largest money market funds are paying close to 5.5% in interest.
Since the Great Recession, money market fund yields have been higher than at any time in history, according to a certified financial planner and proprietor of Lattice Financial in Charlotte, North Carolina. He stated, “This will be taxable income for the majority of investors.”
Further on in Personal Finance:
Generally, earnings from money market mutual funds and high-yield savings accounts are subject to regular income taxation for investors. Assets maintained in a brokerage account are subject to the highest marginal rate of 37%. In contrast, the maximum rate of long-term capital gains is 20%.
Marginal tax brackets for tax year 2023, married filing jointly
Additionally, increasing one’s income may lead to additional financial ramifications, as Mullikin explained, including increased premiums for Medicare Part B and D, which are referred to as the income-related monthly adjustment amount (IRMAA).
“IRMAA is applied as a surcharge, whereas any additional income earned from higher yields is taxed at a progressively higher rate,” he explained. “Therefore, an increase of even $1 in income may result in increased premiums.”
However, alternative investment opportunities may help reduce tax liability, according to financial experts.
Tax-efficient alternatives for funds
Consider Treasury bills if you possess a substantial quantity of cash, advises Catherine Valega, a CFP with Green Bee Advisory in the greater Boston area.
As of December 4, the prevailing interest rates on the majority of Treasury bills, commonly referred to as T-bills, span from one month to one year. These rates comfortably exceed 5%. T-bills are available for purchase via TreasuryDirect and brokerage accounts.
T-bills, in contrast to high-yield savings, certificates of deposit, and money market funds, provide an advantageous tax treatment in that earnings are exempt from state and local taxes. Interest on T-bills remains liable for federal income taxation.
Tax-exempt municipal money market funds are an additional alternative, per Kirk Hackbarth, a CFP and wealth advisor at JMG Financial Group located in Milwaukee. Furthermore, he holds the credentials of a certified public accountant.
In general, municipal bond investors profit from investments in assets issued by municipalities, including state and local governments, without being subject to federal income tax on their gains. As of December 4, some of the largest tax-exempt money market funds are paying approximately 3.5%, per Crane Data.
Hackbarth advised investors in a higher marginal income tax bracket to contemplate municipal money market mutual funds. “The yield after taxes may be greater.”
However, according to experts, the optimal choice for currency ultimately hinges on one’s risk tolerance and objectives.