High Yield Savings Alternatives January 2025

Despite higher interest rates. Many savers are still losing money.

Maximizing Returns: Comparing After-Tax and Inflation-Adjusted Returns Across Various Investment Options

In the search for attractive returns, understanding the impact of taxes and inflation is crucial. Investments like high-yield savings accounts, U.S. Treasury bills, municipal bonds, AAA collateralized loan obligations (CLOs), preferred stocks, and private credit all offer different returns and risk profiles. Your after-tax and inflation-adjusted return will vary significantly based on your tax bracket and the type of investment.

This article compares the after-tax and inflation-adjusted returns for individuals in the 24%, 32%, 35%, and 37% tax brackets. By the end, you’ll have a clearer picture of which investment option might suit your financial needs best.

Investment Comparison

Analysis of After-Tax and Inflation-Adjusted Returns

1. High-Yield Savings Accounts

• Yield: 4%
• After-Tax Returns:
  • 24% Tax Bracket: 4%×(1−0.24)=3.04%
  • 32% Tax Bracket: 4%×(1−0.32)=2.72%
  • 35% Tax Bracket: 4%×(1−0.35)=2.6%
  • 37% Tax Bracket: 4%×(1−0.37)=2.52%
• Inflation-Adjusted Returns:
  • Assuming 3% inflation: After-Tax Return−3%
  • 24% Bracket: 3.04%−3%=0.04%
  • 37% Bracket: 2.52%−3%=−0.48%

Savings accounts are safe and liquid but struggle to beat inflation after taxes.

2. Treasury Bills (3–12 Months)

• Yield: 5.3%
• After-Tax Returns:
  • 24% Tax Bracket: 5.3%×(1−0.24)=4.03%
  • 32% Tax Bracket: 5.3%×(1−0.32)=3.6%
  • 35% Tax Bracket: 5.3%×(1−0.35)=3.44%
  • 37% Tax Bracket: 5.3%×(1−0.37)=3.34%
• Inflation-Adjusted Returns:
  • 24% Bracket: 4.03%−3%=1.03%
  • 37% Bracket: 3.34%−3%=0.34%

Treasury bills are low-risk, state-tax-exempt, and generally provide better inflation-adjusted returns than savings accounts.

3. Municipal Bonds

• Yield: 3.5% (tax-exempt)
• After-Tax Returns:
  • Municipal bonds are generally tax-exempt at the federal level and potentially state and local levels.
  • All tax brackets: 3.5% (no federal tax impact)
• Inflation-Adjusted Returns:
  • 3.5%−3%=0.5%

Municipal bonds offer lower raw yields but their tax-exempt status makes them attractive, especially for those in higher tax brackets.

4. AAA Collateralized Loan Obligations (CLOs)

• Yield: 6%
• After-Tax Returns:
  • 24% Tax Bracket: 6%×(1−0.24)=4.56%
  • 32% Tax Bracket: 6%×(1−0.32)=4.08%
  • 35% Tax Bracket: 6%×(1−0.35)=3.9%
  • 37% Tax Bracket: 6%×(1−0.37)=3.78%
• Inflation-Adjusted Returns:
  • 24% Bracket: 4.56%−3%=1.56%
  • 37% Bracket: 3.78%−3%=0.78%

AAA CLOs are higher yielding than municipal bonds or Treasury bills, but their ordinary income tax treatment reduces after-tax returns.

5. Preferred Stocks

• Yield: 6.5%
• After-Tax Returns:
  • Taxed at favorable rates for qualified dividends (15% for 24% and 32% brackets; 20% for 35% and 37% brackets):
  • 24% and 32% Brackets: 6.5%×(1−0.15)=5.53%
  • 35% and 37% Brackets: 6.5%×(1−0.20)=5.2%
• Inflation-Adjusted Returns:
  • 24% Bracket: 5.53%−3%=2.53%
  • 37% Bracket: 5.2%−3%=2.2%

Preferred stocks offer attractive tax treatment and competitive inflation-adjusted returns for moderate-risk investors.

6. Private Credit

• Yield: 8–12% (assume 10% for analysis)
• After-Tax Returns:
  • 24% Tax Bracket: 10%×(1−0.24)=7.6%
  • 32% Tax Bracket: 10%×(1−0.32)=6.8%
  • 35% Tax Bracket: 10%×(1−0.35)=6.5%
  • 37% Tax Bracket: 10%×(1−0.37)=6.3%
• Inflation-Adjusted Returns:
  • 24% Bracket: 7.6%−3%=4.6%
  • 37% Bracket: 6.3%−3%=3.3%

Private credit offers the highest potential after-tax and inflation-adjusted returns, though it comes with higher risk and illiquidity.

Which Investment Is Best?

• For Low to Moderate Risk (24%–32% Bracket): Preferred stocks provide the best after-tax, inflation-adjusted returns with manageable risk, followed by AAA CLOs and Treasury bills. Municipal bonds are competitive for investors seeking tax-exempt income.
• For Higher Risk and Return: Private credit leads the way in after-tax and inflation-adjusted returns across all brackets, particularly for higher earners who can tolerate risk and illiquidity.

At Sterling Edge Financial, we specialize in helping clients evaluate these options in the context of their financial goals and tax situations.  Contact us today to discuss how to optimize your portfolio for after-tax and inflation-adjusted returns!

Other investment considerations and financial planning questions will apply.  This article is for education purposes only and should not be considered advice or an investment recommendation.  

Stay invested. Stay diversified. Stay focused.

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This content is being provided for informational purposes only and should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions. Diversification and asset allocation strategies do not assure profit or protect against loss. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.

Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.  Investing involves risk of loss. Diversification and asset allocation strategies do not assure profit or protect against loss.

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