Challenges Facing your High Yield Savings Account - 22% Federal Tax Bracket

Stop losing money unknowingly! Read now to learn how to beat inflation, outsmart taxes, and make your investments work for you.

High Yield Savings Alternatives: January 2025

Despite Higher Interest Rates, Many Savers Are Still Losing Money

Hey there! Kit Lancaster, CFP® here—a financial planner specializing in helping individuals with rising incomes and growing financial questions. If you're looking to make your money work harder, you're in the right place. With interest rates and inflation impacting your purchasing power, it's essential to find the best avenues for your savings and investments.

If you have excess cash and you are wondering where else you can put your money, this article will you visualize and ask an important question.

1) What is my potential return after taxes and inflation?

2) How much risk will you assume to generate the potential return?

Let's explore some smart alternatives to high-yield savings accounts, breaking them down to see what's really left in your pocket after a 22% federal tax rate and inflation. Check this out!

Investment Comparison

Investment	Yield (Approx.)	Tax Treatment	Risk Profile	After-Tax and Inflation Return (22% Federal Tax)
High-Yield Savings Account	4%	Taxable as ordinary income	Virtually no risk	0.12%
Treasury Bills (3–12 Months)	5%	Federal tax only; exempt from state and local taxes	Low risk	0.9%
Municipal Bonds	3.5% (tax-exempt)	Generally exempt from federal and some state taxes	Low to moderate risk	0.5%
AAA Collateralized Loan Obligations (CLOs)	6%	Taxable as ordinary income	Moderate risk	1.68%
Preferred Stocks	7%	Taxable as ordinary income	Moderate risk	2.46%
Private Credit	8–12% (assume 10%)	Taxable as ordinary income	Higher risk	4.8%

Analysis of After-Tax and Inflation-Adjusted Returns for the 22% Federal Tax Rate

1. High-Yield Savings Accounts

Yield: 4%
After-Tax Returns: 3.12%
Inflation-Adjusted Returns: 0.12%

High-yield savings accounts are safe and liquid, making them ideal for emergency funds. However, after accounting for taxes and inflation, the real return is modest.

2. Treasury Bills (3–12 Months)

Yield: 5%
After-Tax Returns: 3.9%
Inflation-Adjusted Returns:0.9%

Treasury bills are low-risk and exempt from state and local taxes, providing a slightly better after-tax and inflation-adjusted return compared to high-yield savings accounts.

3. Municipal Bonds

Yield: 3.5% (tax-exempt)
After-Tax Returns: Tax-free at the federal level: .
Inflation-Adjusted Returns: 0.5%

Municipal bonds offer tax-exempt income, making them attractive for investors seeking steady, tax-efficient returns, though the real return after inflation is modest.

4. AAA Collateralized Loan Obligations (CLOs)

Yield: 6%
After-Tax Returns: 4.68%
Inflation-Adjusted Returns: 1.68%

AAA CLOs provide higher yields with moderate risk, offering better after-tax and inflation-adjusted returns compared to more conservative investments.

5. Preferred Stocks

Yield: 7%
After-Tax Returns: 5.46%
Inflation-Adjusted Returns: 2.46%

Preferred stocks, assuming a 7% yield and taxed at ordinary income rates, offer a solid return. While their tax treatment is less favorable than qualified dividends, they remain a strong option for moderate-risk investors seeking growth beyond inflation.

6. Private Credit

Yield: Assume 10%
After-Tax Returns: 7.8%
Inflation-Adjusted Returns: 4.68%

Private credit offers the highest potential returns but comes with higher risk and lower liquidity. Investors should assess their risk tolerance before considering this option.

Which Investment Is Best?

Trick question. There is no best investment. When building an income strategy, short-term savings strategy, or simply putting money to work beyond a bank account, it is important to evaluate your goals, risk tolerance, and other needs. The asset classes outlined here can help you visualize and see the challenges of making money after taxes and inflation—for most investors, their most expensive costs. It also highlights the need to consider taking additional risks or exploring other asset classes to capture real growth.

Asset Class Overview

For Low to Moderate Risk:

Preferred stocks provide attractive after-tax and inflation-adjusted returns, followed by AAA CLOs and Treasury bills. Municipal bonds offer tax-efficient income but with lower real returns.

For Higher Risk and Return:

Private credit stands out for investors willing to accept higher risk and limited liquidity in exchange for higher potential returns.

At Sterling Edge Financial, we're here to help you navigate these options and align your investments with your financial goals.

Sources:

High-Yield Savings Accounts: MarketWatch
Treasury Yields: U.S. Treasury Department
Preferred Stocks and Private Credit Insights: Morningstar

Disclosure: The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for their own particular situation before making any investment decision. Tax rates and other factors may apply or have changed since publication.

This document, including all content, text, graphics, and intellectual property, is protected under copyright law. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the author or publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, please contact Sterling Edge Financial.