Here’s where to invest your money to save taxes in 2024

  • Some of the largest money market funds are paying more than 5%, and investors could see a higher tax bill in April.
  • However, investors may consider other options such as Treasury bills or municipal money market funds to save on future taxes.

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If you pump cash into money market mutual funds, you could see a higher tax bill for 2023 in April. But experts say other investments could reduce taxes for 2024.

Investors and institutions moved cash into money market funds amid rising interest rates and accessed balances $5.84 trillion As of November 29, the Investment Company Institute reported. Meanwhile, some of the largest money market funds are now paying out Close to 5.5%As of December 4, according to Crane Data.

Money market fund returns are higher than in any year since the Great Recession, said certified financial planner Seth Mulliken, founder of Lattice Financial in Charlotte, North Carolina. “For most investors, this would be taxable income,” he said.

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Investors typically owe regular income taxes on the gains of money market mutual funds or high-yield savings accounts, with top marginal rates of 37% for assets held in a brokerage account. In comparison, the highest long-term capital gains rate is 20%.

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Additionally, boosting your income can have other financial consequences, such as higher premiums for Medicare Part B and D, known as the income-related monthly adjustment amount, or IRMAA, Mulliken said.

“While any additional income earned from higher returns is taxed at a progressively higher rate, IRMAA applies as an additional fee,” he said. “This means that even a dollar of additional income can result in higher premiums.”

However, financial experts say other investment options can help reduce the tax burden.

If you have a large amount of cash, you might consider Treasuries, according to Katherine Valega, a CFP with Green Bee Advisory in the greater Boston area.

With terms ranging from one month to one year, most Treasury bills, known as T-bills, are currently paying in excess of 5%, as of December 4. You can purchase Treasury bills through TreasureDirect or a brokerage account.

However, Treasury bills offer a tax advantage over products such as high-yield savings, certificates of deposit, or money market funds: There are no state or local taxes on profits. Interest on Treasury securities is still subject to federal income taxes.

Another option is tax-exempt municipal money market funds, according to Kirk Hackbarth, a 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 municipalities, such as state and local governments, and investors generally avoid federal income taxes on the dividends. Some of the largest tax-exempt money market funds are paying about 3.5%, as of December 4, according to Crane data.

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“Investors in the higher marginal income tax bracket should consider municipal money market mutual funds,” Hackbarth said. “The after-tax return could be higher.”

However, experts say the best cash option ultimately depends on your risk tolerance and goals.

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