As the Federal Reserve’s recent rate cut takes effect, savers who have grown accustomed to high interest rates may be in for a rude awakening. Not only will their returns on cash likely dwindle, but they may also face higher taxes on the interest they do earn due to the impending expiration of the Trump tax cuts at the end of 2025.
Financial experts warn that the combination of lower interest rates and higher taxes will have a significant impact on savers across the board. “It’s a double whammy,” says Brian Large, partner at Lenox Advisors. “You’re earning less on your cash, and what you do earn will be taxed at a higher rate.”
The Tax Cuts and Jobs Act of 2017, which slashed income tax rates for individuals, is set to expire at the end of 2025. If not extended, the affected brackets will revert to pre-TCJA levels, resulting in higher tax rates for almost everyone.
To mitigate the impact, financial advisers recommend taking advantage of current income tax rates by accelerating income in 2024 and 2025. Retirees may want to consider withdrawing more than their required minimum distribution, while others may benefit from a Roth conversion to save money by paying lower tax rates now.
With yields dropping on fixed-income holdings, savers may need to look elsewhere for returns. Stocks, which typically generate higher returns than fixed-income holdings, may be a viable option. Plus, stock gains are taxed at a lower rate than fixed-income interest. Small and midsized companies, which tend to benefit from lower borrowing costs, may offer greater financial upside for investors.
For those who need regular income, high-quality, dividend-growth stocks can provide a reliable source of revenue while also offering potential for long-term growth. By diversifying their portfolios and taking advantage of current tax rates, savers can minimize the impact of higher taxes and lower interest rates.
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