“Wait… I Pay Taxes on My HYSA???” | Steven Evensen

“Wait… I Pay Taxes on My HYSA???”

By: Steven Evensen

For many savers, the appeal of a high-yield savings account (HYSA) is simple: better interest rates than a traditional savings account, liquidity, and relative safety. But what often gets overlooked is that the interest earned in these accounts is subject to taxation. Yes… Sadly, that extra boost in savings doesn’t come tax-free!? Therefore, as we approach tax season, I thought it would be helpful to review a few more tax-efficient alternatives to the high-yield savings account.

How High-Yield Savings Are Taxed

Interest earned in a HYSA is considered taxable income by the IRS. Financial institutions will issue a Form 1099-INT if you earn $10 or more in interest during the year, although even smaller amounts are technically taxable. This interest is taxed at your ordinary income tax rate, meaning it is added to your total taxable income for the year. Depending on your tax bracket, this could significantly reduce the net benefit of a high-yield account.

For example, if you earn $1,000 in interest and are in the 24% federal tax bracket, you’ll owe $240 in federal taxes, plus any applicable state taxes. If you live in a high-tax state like California or New York, your tax bill could be even higher.

Alternative Ways to Earn Interest More Tax-Efficiently

If you’re looking for ways to earn interest with less of a tax bite, here are some alternatives to consider:

1. Municipal Bonds (Munis)

Municipal bonds are issued by state and local governments and come with a major tax benefit: interest earned is generally exempt from federal income tax and, in many cases, from state taxes if you live in the issuing state. This makes munis particularly attractive for high earners in high-tax states. While returns may not be as high as some other investments, the tax advantages can make them a better after-tax option.

2. U.S. Treasuries

Treasury securities, such as Treasury bills (T-bills), Treasury notes, and Treasury bonds, offer another tax advantage. The interest earned is exempt from state and local taxes, although it is still subject to federal income tax. For those in states with high income taxes, these options can provide an effective way to earn interest while reducing the overall tax burden.

3. Tax-Advantaged Accounts (IRAs, 401(k)s, and HSAs)

Instead of parking excess cash in a high-yield savings account, you may want to contribute to tax-advantaged accounts:

• Roth IRA: Contributions are made with after-tax dollars, but earnings grow tax-free if withdrawn under qualified conditions.
• Traditional IRA/401(k): Contributions may be tax-deductible, reducing your taxable income in the current year, though withdrawals are taxed in retirement.
• Health Savings Accounts (HSAs): If you have a high-deductible health plan, an HSA allows tax-free contributions, growth, and withdrawals for qualified medical expenses.

4. Investing in Stocks or ETFs

For those with a longer investment horizon, stocks or ETFs might be an option. Long term capital gains are taxed at a lower rate than ordinary income, typically at 15% or 20%, depending on your tax bracket. While stock market investments carry risk, they offer potential for long-term growth and tax efficiency.

What’s the Right Choice for You?

There’s no one-size-fits-all solution when it comes to earning interest and minimizing taxes. A HYSA is great for liquidity and emergency savings, but for long-term growth, tax-efficient alternatives may offer better after-tax returns. The key is balancing accessibility, risk tolerance, and tax efficiency.

If you’re unsure about the best place for your savings, working with a financial advisor can help you develop a strategy that aligns with your financial goals while minimizing your tax burden. Because at the end of the day, it’s not just about what you earn— it’s about what you keep!

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Sources:

https://www.incharge.org/financial-literacy/budgeting-saving/do-you-pay-taxes-on-high-yield-savings-account/#:~:text=Unlike%20tax%2Ddeferred%20accounts%20such,determines%20your%20marginal%20tax%20rate.

https://www.irs.gov/tax-exempt-bonds

https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans

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Gerber Kawasaki Wealth & Investment Management is an investment advisor located in California. Gerber Kawasaki Wealth & Investment Management is registered with the Securities and Exchange Commission (SEC). Registration of an investment advisor does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Gerber Kawasaki only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Gerber Kawasaki Wealth & Investment Management 's current written disclosure brochure filed with the SEC which discusses, among other things, Gerber Kawasaki Wealth & Investment Management's business practices, services and fees, is available through the SEC's website at: https://www.adviserinfo.sec.gov .?

Steven Evensen is a Financial Advisor of Santa Monica, California-based Gerber Kawasaki Inc., an SEC-registered investment firm with approximately ~$3.16B billion in assets under management as of 9/30/24.? The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss. Readers shouldn't buy any investment without doing their research to determine if the investments are suitable for their situation. “All investments involve risk and one should consult a financial advisor before making any investments. Past performance is not indicative of future results."?