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often unpublished, penalties for early withdrawal.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!
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