“Higher Yields in Money Market Funds Could Lead to Higher Tax Bills for Investors”
Investors who have parked their cash in money market mutual funds are reaping the rewards as some of the largest funds are paying close to 5.5%, as of December 4. This surge in interest rates has caused balances in money market funds to reach $5.84 trillion as of November 29, according to the Investment Company Institute.
However, while these high yields may be appealing, investors may be in for a rude awakening come tax time in 2023. Certified financial planner, Seth Mullikin, warned that for most investors, the income earned from money market funds will be taxable.
The taxation of this income could further complicate matters for investors in terms of their overall tax picture. For assets held in brokerage accounts, investors typically owe regular income taxes at a rate of 37%, compared to the 20% long-term capital gains rate. Other financial consequences, such as higher premiums for Medicare Part B and D, could also be triggered by additional income.
In light of these potential tax implications, financial experts advise considering alternative investment options in order to mitigate the tax burden. Treasury bills, for example, are currently paying well over 5% and offer a tax benefit over other products as they are not subject to state or local taxes on earnings.
Additionally, tax-exempt municipal money market funds could provide a solution for investors in higher marginal income tax brackets. These funds, which invest in assets issued by municipalities, can offer an after-tax yield that is higher than traditional money market funds.
It’s worth noting that the best option for cash ultimately depends on an investor’s risk tolerance and goals. As the landscape of money market funds continues to evolve, it’s important for investors to stay informed about potential tax implications and consider different investment strategies to optimize their financial situation.