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Additionally, increased income can have other financial consequences, such as higher Medicare Parts B and D premiums, known as the Income-Related Monthly Adjustment Amount (IRMAA), Mullikin said.
“Additional income from higher yields is taxed at progressively higher rates, but IRMAA is applied as a surcharge,” he said. “This means that even $1 of additional income can cause premiums to rise.”
But financial experts say other investment options may help minimize your tax burden.
If you have a lot of cash, you may want to consider Treasury bills, says Katherine Varega, CFP at Green Bee Advisory in the Boston metropolitan area.
Most Treasury bills, known as T-bills and with terms ranging from one month to one year, had yields well above 5% as of Dec. 4. T-bills can be purchased through TreasuryDirect or a brokerage account.
However, Treasury bills are more tax-advantaged than products such as high-yield savings, certificates of deposit, and money market funds, and there are no state or local taxes on your earnings. T-Bill interest is still subject to federal income tax.
Another option is tax-exempt municipal money market funds, says Kirk Hackbarth, 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 local governments, such as state and local governments, and investors generally avoid federal income taxes on their earnings. Some of the largest tax-exempt money market funds paid about 3.5% as of Dec. 4, according to Crane Data.
“Investors in higher marginal income tax brackets should consider municipal money market mutual funds,” Hackbarth said. “After-tax yields could be even higher.”
But experts say the best cash option ultimately depends on your risk tolerance and goals.
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