Your Cash Is Earning More. So Is the IRS.

Your Cash Is Earning More. So Is the IRS.

 

­

Cash is finally paying people again.
­

After years of earning almost nothing in savings accounts, money market funds, and CDs, seeing a meaningful yield feels like a win.
­

And in many ways, it is.
­

Cash can provide stability. It can create flexibility. It can help cover an emergency, fund a purchase, or keep you from selling investments at the wrong time.
­

But there is another side to the story.
­

The interest showing up in your account may not be the amount you actually keep.
­

At its July meeting, the Federal Reserve kept the federal funds rate in a range of 3.50% to 3.75%. That is one reason cash yields remain more attractive than they were during the near-zero rate environment of a few years ago.
­

The number most people focus on is the advertised yield.
­

The more important number is the after-tax yield.
­

Consider a simple example.
­

If $250,000 earns 4%, that produces $10,000 of annual interest. If federal and state taxes absorb 35% of that income, the investor keeps $6,500.
­

­­

	Gross Yield	After 35% Tax Drag
$250,000 balance	4.0% yield	2.6% yield
Annual interest earned	$10,000	$6,500
What it means	The advertised rate	What is actually kept

­
The account still earned money. The cash may still be doing exactly what it is supposed to do.

­
But the result looks different once taxes are included.

­
Interest from bank accounts, money market accounts, CDs, and many bonds is generally taxable. The IRS requires that taxable interest be reported even in certain cases where a Form 1099-INT is not received.

­
That does not make these accounts bad.

­
It just means the yield should not be viewed in isolation.

The bigger issue is not whether cash is good or bad.

­
It is whether the cash has a purpose.

­­
An emergency fund needs to be liquid. Money for a home purchase next year probably should not be taking stock market risk. A business owner may need extra reserves to handle payroll, taxes, or an unexpected slowdown.

­
That cash is doing a job.

­
The problem starts when money intended for one purpose quietly becomes money with no purpose at all.

­
A large balance builds up because rates feel attractive. Months turn into years. The money keeps earning interest, but it may also keep generating taxes while losing purchasing power to inflation.

­
Meanwhile, long-term goals may be underfunded.

­
The cash feels safe.

­
But safe from what?

­
Market volatility is one type of risk. Inflation is another. Taxes are another. So is the risk of becoming too comfortable with an allocation that no longer fits the plan.

Two investments can advertise similar yields and produce very different outcomes.

­
The differences may include:

• Federal and state tax treatment
• Access to the money
• Credit and market risk
• FDIC insurance eligibility
• How long the yield is expected to last
• What happens if interest rates fall

­
Some municipal bonds may generate interest that is exempt from federal income tax, although the treatment can depend on the specific investment and the investor’s circumstances.

­
That does not automatically make a tax-exempt investment better.

­
A lower tax-exempt yield may be more attractive for one investor and less attractive for another. Liquidity, risk, time horizon, and the rest of the portfolio still matter.

­
The highest quoted yield is not always the best result.

­
The best result is the one that fits the job the money needs to do.

Instead of asking only, “What is this account paying?” consider asking:

• What is the yield after taxes?
• When will I need this money?
• How much needs to be available immediately?
• What risks am I trying to avoid?
• Am I accepting different risks without realizing it?
• When will I revisit this decision?

­
These are planning questions, not predictions.

­
Nobody knows exactly where interest rates will go next. The goal is not to move every dollar whenever the Federal Reserve meets.

­
The goal is to make sure each dollar has a purpose.

Cash is useful.

­
It helps people sleep at night. It creates options. It can prevent emotional decisions during difficult markets.

­
But cash is not automatically efficient just because it earns interest.

­
The headline yield is only the beginning of the calculation. What matters is what you keep, what the money is for, and whether it still fits the rest of the plan.
­

­
Not because the cash needs to be moved.

­
Because it needs to have a job.

Federal Reserve, FOMC Statement, July 29, 2026.  https://www.federalreserve.gov/newsevents/pressreleases/monetary20260729a.htm

Internal Revenue Service, Topic No. 403, Interest Received.  https://www.irs.gov/taxtopics/tc403

Internal Revenue Service, Tax-Exempt Bonds.  https://www.irs.gov/tax-exempt-bonds

Internal Revenue Service, Form 1099-INT Interest Income.  https://www.irs.gov/forms-pubs/about-form-1099-int

­

Stock Market Calendar This Week: