Saving in a 32% Federal Tax Bracket - February 2025

High Yield Savings Alternatives: February 2025 Despite Higher Interest Rates, Many Savers Are Still Losing Money

Are you confident your savings are keeping up with inflation and taxes? Have you considered how much of your investment returns are truly left in your pocket after these expenses? For many savers, the reality is that their "gains" are actually losses in disguise. This article is here to help you ask the right questions and better visualize the impact of taxes and inflation on your investments.

Here, we'll explore key alternatives to high-yield savings accounts and examine their after-tax and inflation-adjusted returns for those in the 32% federal tax bracket. You’ll gain a clearer understanding of where your money can work harder, the risks involved, and the trade-offs you might need to consider. Let’s dive in and take a closer look!

Investment Comparison

Investment	Yield (Approx.)	Tax Treatment	Risk Profile	After-Tax and Inflation Return (32% Federal Tax)
High-Yield Savings Account	4%	Taxable as ordinary income	Virtually no risk	-0.28%
Treasury Bills (3–12 Months)	5%	Federal tax only; exempt from state and local taxes	Low risk	0.4%
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	1.08%
Preferred Stocks	7%	Taxable as ordinary income	Moderate risk	1.76%
Private Credit	8–12% (assume 10%)	Taxable as ordinary income	Higher risk	3.8%

Example Assumes 3% Inflation** Find Current Inflation Numbers Here

Analysis of After-Tax and Inflation-Adjusted Returns for the 32% Federal Tax Rate

1. High-Yield Savings Accounts

Yield: 4%
After-Tax Returns: 2.72%
Inflation-Adjusted Returns: -.028%

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: 3.4%
Inflation-Adjusted Returns: 0.4%

Treasury bills are low-risk and exempt from state and local taxes, but their after-tax, inflation-adjusted return is minimal in this tax bracket.

3. Municipal Bonds

Yield: 3.5% (tax-exempt)
After-Tax Returns: 3.5%
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: 4.08%
Inflation-Adjusted Returns: 1.08%

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: 4.76%
Inflation-Adjusted Returns: 1.76%

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: 6.8%
Inflation-Adjusted Returns: 3.8%

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.

Key Takeaways

Taxes and inflation can significantly erode the real returns on your investments, particularly for those in higher tax brackets.
Low-risk options like high-yield savings accounts and Treasury bills often struggle to provide positive real returns after taxes and inflation.
Municipal bonds remain attractive for tax efficiency but offer modest returns after inflation.
Moderate-risk investments like preferred stocks and AAA CLOs offer better after-tax and inflation-adjusted returns.
For higher returns, private credit provides significant potential but comes with greater risk and illiquidity.
There is no one-size-fits-all solution—aligning investments with your financial goals and risk tolerance is key.

Conclusion

Understanding the true returns of your investments after taxes and inflation is crucial to building a resilient financial plan. By exploring these alternatives, you can make informed decisions that align with your goals and maximize your potential for growth.

At Sterling Edge Financial, we’re dedicated to helping you navigate these challenges and opportunities. Follow us for more insights, and let’s continue the conversation about how to make your money work harder for you.

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.

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