Where Do You Keep Your Emergency Cash?
If you have an emergency fund or are saving for a house, and you store your cash in a high-yield savings account, you could be earning around 4-5% depending on the account and institution. This is great news for your wallet, but it's important to remember that you'll also need to pay taxes on that amount. After factoring in federal and state taxes, your net earnings may not be as high as you initially expected. It might be a good time to reconsider where you keep your emergency cash or house fund. Keep in mind that interest rates can fluctuate based on your account balance and tax rates, so it's crucial to consider these factors. In the past, when the interest earned was less than 1%, the timing of holding your cash didn't matter much, resulting in minimal tax implications.
Savings By Account
If you've managed to save $100,000 in a high-yield savings account, you might be curious about the potential returns and take-home interest from different investment options. Just like any other income, the interest you earn from your accounts can be subject to taxation at the same rate as your regular income. These investment options offer the same advantage of keeping your cash readily accessible, allowing you to liquidate it whenever necessary, but may allow you to keep more of the money you earn off your cash. Let's delve into the potential returns on your investment while ensuring liquidity.
The above chart is for informational purposes only and is not based on a specific product or experience and therefore should not be construed as personal advice. Individual experiences may vary based on personal circumstances, geographical location and other considerations. There can be no assurance that the above hypothetical calculations can achieve the same or similar results in all comparable situations.
While a high-yield savings account is still a great place to keep your money you do have more options to lower the tax burden on that interest you are earning which could net you more cash. Here are some options as we look at the chart above with some scenarios to help you understand. These scenarios are not all encompassing and you should consult your financial advisor to see what would be the best investment option for you because it is dependent on your state or federal tax rate.
High-Yield Savings Account Versus Short-term Treasuries
If you compare a high-yield savings account against short-term treasuries it may offer higher returns than a high-yield savings account because short-term treasuries are exempt from state and local taxation. You would be charged federal income tax on treasuries, which is dependent on your current federal tax rate, but it could net you savings. For example, if you invested in a short-term treasury account with a 5.04% interest rate in a state with income tax you could be looking at a net increase of about $852 in the above scenario. This means you would take home more money from just having your cash in a high-yield checking account in this scenario.
High-Yield Savings Account Versus Money Market Funds
Now let’s compare a high-yield savings account against a money market fund. A money market fund is not FDIC insured but may have a higher interest rate in the current market at about 5.22% then the short-term treasury we just talked about in the previous comparison but, a money market is taxed both at the federal level and state level, which can impact your take home amount if you live in a state with income taxes. Depending on your situation investing in a money market may be a better investment in comparison to a high-yield savings account because you get a higher return on your investment. If we again look above in the chart you would see that you are netting a $461 difference if you were investing in a money market fund versus a high-yield savings account.
High-Yield Savings Account Versus 1 Month Treasuries
Let’s turn to a one-month treasury versus a high-yield account. One month treasuries are not taxable at the state level but are taxable on the federal level. These are still a liquid investment as well but you could earn more because of the higher interest rate and how it’s taxed. If we again look above in the chart you would see that you are netting a $1,029 difference if you were investing in a one month treasury versus a high-yield savings account depending on your taxes.
High-Yield Savings Account Versus Municipal Money Funds
Our final comparison will be for a municipal money fund versus a high-yield savings account. A municipal fund can have some bonds that are non-taxable in some states, such as New York on the federal level but they are always taxed on the state level. We recommend checking with your financial advisor to understand what portion would be exempt. While these funds are daily liquid they are not FDIC insured. If we again look above in the chart you would see that you are netting a $1,087 difference if you were investing in a municipal money fund versus a high-yield savings account depending on your taxes.
To maximize the potential of your available cash, we would advise you to seek guidance from a financial advisor. They can provide expert recommendations tailored to your specific situation, ensuring the right fit for your situation and risk level.
