Many individuals are not maximizing their cash holdings, resulting in significant losses in potential interest earnings. Currently, there are over $18 trillion in bank deposits across the United States, with the average savings account yielding a mere 0.4%. As the Federal Reserve has begun to cut interest rates, expected further reductions in 2026 could mean that now is the crucial time for savers to ensure they are accessing the best possible interest rates.
To enhance your returns, it is essential to seek out accounts that offer substantially higher interest rates. This article will explore familiar options such as high-yield savings accounts and certificates of deposit (CDs), as well as introduce a less common but advantageous product known as multi-year guaranteed annuities (MYGAs). By utilizing these financial tools wisely, you could earn hundreds, if not thousands, of dollars more in interest annually.
Understanding Your Cash Needs
The foundational rule in managing investments revolves around understanding when you will need access to your money. It is advisable to categorize your funds into short-term and long-term segments, a concept elaborated in the book *Retire Today*. Within the short-term category, funds can be further divided into three time frames: immediate, soon, and later.
For immediate cash needs, a high-yield savings account is often the best choice. These accounts provide safety and accessibility similar to traditional savings accounts while offering interest rates that can be eight to ten times higher. For example, in December 2024, a client transferred $100,000 from a bank account earning 0.4% to a high-yield savings account averaging 3.8% through 2025, resulting in an additional $3,400 in interest.
Kiplinger regularly updates its listings of the best high-yield savings accounts, with many currently offering rates above 4%. This strategy allows you to keep your funds readily available while earning significantly better returns.
Preparing for Short-Term and Long-Term Needs
When you have surplus funds after setting aside enough for immediate expenses, consider using CDs for money you expect to use within six months to five years. Currently, CDs offer interest rates around 4%. The advantage of CDs lies in their fixed interest rates over a specified term, providing stable earnings compared to variable savings account rates.
A common strategy is to establish a CD ladder, which allows for staggered maturity dates. This approach can help you maintain higher interest rates even if the Federal Reserve decides to cut rates further, while also ensuring access to some cash without penalties.
For funds earmarked for later use, multi-year guaranteed annuities (MYGAs) can provide attractive benefits. Similar to CDs, MYGAs offer guaranteed interest rates over a set duration but are issued by insurance companies instead of banks. MYGAs typically provide higher interest rates, often exceeding those of comparable CDs by approximately one percentage point.
It is important to note the tax implications associated with MYGAs. These accounts are tax-deferred, delaying taxation on earned interest until withdrawals are made. However, withdrawing funds before the age of 59½ incurs a 10% penalty on the interest earned. Therefore, MYGAs are ideal for individuals over this age who have sufficient accessible cash and can accept potential early withdrawal penalties in exchange for tax benefits and higher interest rates.
Planning for Tax Obligations
With increased interest earnings comes the responsibility of managing taxes. While MYGAs allow for tax deferral, high-yield savings accounts and CDs typically require you to report interest earnings annually, regardless of whether the money has been utilized. It is advisable to inform your tax preparer or financial adviser about your interest income to ensure proper tax planning.
Experts may recommend strategies such as making quarterly estimated tax payments or adjusting withholding on your paycheck to avoid penalties at tax time. Utilizing individual retirement accounts (IRAs) for tax withholding can also be beneficial.
To maximize your earnings and avoid surprises during tax season, follow these three fundamental steps:
1. Determine when you need access to your funds: right now, soon, or later.
2. Identify the best interest-bearing accounts aligned with your cash needs.
3. Prepare for the tax implications of any additional interest earnings.
By implementing these strategies, you can significantly enhance your interest income, potentially funding future expenses, such as a vacation, while ensuring you are prepared for any tax liabilities that may arise.
