With the recent interest rate increases made by the Federal Reserve, it is time once again to actively manage your savings to ensure you are getting the most for your money. Here are some tips to consider.
Maximize the kiddie tax opportunity. Remember, the first $1,150 of your child’s unearned income such as interest and dividends is tax-free and the next $1,150 is taxed at your child’s tax rate. Leverage this information by using the Unified Gifts to Minors Act to manage a savings account in their name. Just understand that when your child reaches adulthood, the account transfers to them.
Look into tax-advantaged bonds. Municipal bonds, most of which are exempt from federal income tax, are starting to make a comeback. In addition, bonds within your home state may also be exempt from state taxes. So with higher interest rates, review the tax benefit of these bonds versus higher interest, taxable alternatives. But understand the underlying risks of individual bonds in case the municipality is unable to pay back the debt.
CDs are making a comeback. Banks are competing for your deposits once again. But what is new this time around are higher, often unpublished, penalties for early withdrawal. So before you leap at that great rate, understand the cost if you need the funds before maturity. Also understand the true after-tax interest rate.
U.S. Treasury Securities. U.S. Treasury investments are generally not subject to state or local tax. So as rates go up, and if banks look uncertain to you, you may wish to consider this tax-advantaged savings alternative. And investing in Treasury alternatives is now easier than ever by visiting www.treasurydirect.gov.
With savings alternatives at interest rates of 4% to 5%, savers now have many choices to manage their money. The key message: review your options, apply an after-tax calculation to understand your true return, and know your risks!
