Here’s where to invest your cash to save on taxes in 2024

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If you’ve got poured cash into money market mutual funds, you would see a higher 2023 tax bill in April. But different investments might cut back your 2024 taxes, consultants say.

Investors and establishments have funneled cash into cash market funds amid rising interest rates, and balances reached $5.84 trillion as of Nov. 29, the Investment Company Institute reported. Meanwhile, a few of the largest cash market funds at the moment are paying close to 5.5%, as of Dec. 4, in accordance to Crane Data.

Money market fund yields are larger than any yr because the Great Recession, mentioned licensed monetary planner Seth Mullikin, founding father of Lattice Financial in Charlotte, North Carolina. “For most traders, this can be taxable earnings,” he mentioned.

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Investors usually owe common earnings taxes on earnings from cash market mutual funds or high-yield savings accounts, with high marginal charges of 37% for property held in a brokerage account. By comparability, the very best long-term capital beneficial properties charge is 20%.

Plus, boosting your earnings can produce other monetary penalties, corresponding to larger premiums for Medicare Part B and D, generally known as the income-related month-to-month adjustment quantity, or IRMAA, Mullikin mentioned.

“While any extra earnings earned from larger yields is taxed at a progressively larger charge, IRMAA applies as a surcharge,” he mentioned. “This signifies that even $1 of extra earnings might set off larger premiums.”

However, different funding choices might assist decrease the tax burden, monetary consultants say.

Tax-friendly choices for cash

If you will have a large quantity of cash, you could contemplate Treasury bills, in accordance to Catherine Valega, a CFP with Green Bee Advisory in the better Boston space.

With phrases starting from one month to one yr, most Treasury payments, generally known as T-bills, are at the moment paying well over 5%, as of Dec. 4. You should buy T-bills by way of TreasuryDirect or a brokerage account.

However, T-bills supply a tax profit over merchandise like high-yield financial savings, certificates of deposit or cash market funds: no state or native taxes on earnings. T-bill curiosity continues to be topic to federal earnings taxes.  

Another choice is tax-exempt municipal cash market funds, in accordance to Kirk Hackbarth, a CFP and wealth advisor at JMG Financial Group in Milwaukee. He can also be a licensed public accountant. 

Municipal bonds usually invest in property issued by municipalities, corresponding to state and native governments, and traders typically keep away from federal earnings taxes on earnings. Some of the largest tax-exempt cash market funds are paying round 3.5%, as of Dec. 4, in accordance to Crane Data.

“Investors in a better marginal earnings tax bracket ought to contemplate municipal cash market mutual funds,” Hackbarth mentioned. “The after-tax yield may be larger.”

However, the most suitable choice for cash in the end relies upon on your threat tolerance and objectives, consultants say.

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