|
☕ DrinkCoffeeAndProfit
Smart money moves before breakfast
|
Inspiration Quote for the Day
“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”
— Jean-Baptiste Colbert
|
|
The Morning Ritual
The Interest Your Savings Earned Last Year Came With a Second Bill Nobody Withheld
|
Ray pulled the front wheel off my truck Tuesday and told me the smartest thing he did last year. He moved `$40,000` out of a checking account paying nothing. It went into an online savings account paying `4%`. Good move. Then an envelope arrived in January and taught him the other half.
The Fed chair speaks at `10:00` this morning, Eastern time. Traders put the odds of a September hike near `1` in `3`. Nothing in that speech touches the line I want to show you. That line was already settled by which account holds your cash.
|
In One Sip
► The new Fed chair gives his first Jackson Hole keynote at `10:00` a.m. Eastern today. Traders price about a `1` in `3` chance of a September hike.
► Top savings accounts and money-market funds have paid around `4%` all year. Cash finally pays you something.
► Your bank reports every dollar of that interest to the IRS. The form is a 1099-INT. It gets filed on anything over `$10`.
► Your paycheck withholds tax as you earn it. Your savings account withholds nothing. The bill just waits.
► Treasury bill interest is exempt from state and local income tax. Bank interest is not. Same yield on the screen. Two different numbers after tax.
|
Why It Matters for Your Money
Run Ray’s numbers. `$40,000` at `4%` paid him `$1,600` last year. Federal tax in the `22%` bracket took about `$352`. His state took another `5%`. That is -`$80` handed over for using the wrong container. The same `$1,600` earned in Treasury bills would have shown `$0` on the state line.
Eighty dollars sounds like a rounding error. Scale it up. A retired couple sitting on `$150,000` in cash earns `$6,000` at `4%`. State tax at `5%` runs -`$300` every year they leave it there.
The federal side is where it bites. That `$6,000` lands with nothing withheld, so -`$1,320` comes due at filing time. Think about that for a second. Your employer takes its cut from every paycheck without asking. Your bank hands you the gross and lets April do the collecting.
|
The Wealth Angle
Now here is the part most people miss. Two years of `4%` cash quietly pushed millions of savers into estimated-tax territory. Their pay never changed. Their interest did.
I park my own emergency cash in a Treasury-only money-market fund. That is a fund holding nothing but short-term government IOUs. The money comes back to my bank in a day. The state line reads `$0`. Read the fund’s year-end letter, because a few states apply a threshold test before they honor that break.
The safe harbor is the other half of this. Pay `90%` of this year’s tax or `100%` of last year’s and the penalty goes away. Make it `110%` if your income topped `$150,000`. The next estimated payment is due September `15`. I would not leave another year of interest sitting in a state-taxed account.
The speech at `10:00` can move your yield. It cannot move your state tax code.
|
☕ Key Insight:
Cash pays roughly the same everywhere now, so the yield stopped being the decision. The container is the decision. A Treasury bill and a savings account can both print `4%` and hand you two different numbers after tax.
|
Coffee Break Move
If you are comfortable: Pull last January’s 1099-INT and read the interest total. Then check what your cash balance is today. A bigger balance means a bigger bill. Park the next chunk in Treasury bills or a Treasury-only fund at your brokerage. Then either raise your withholding at work or send an estimated payment by September `15`.
If you are stretched: Check what your savings account actually pays this morning. Big-bank savings still pays around `0.40%`. Moving `$5,000` to an account paying `4%` earns about +`$180` more a year. Ten minutes of typing.
Ray called me Wednesday night from his kitchen table. He is putting his next `$20,000` into three-month bills before anyone says a word from Jackson Hole. The goose does not have to hiss. It can just stop showing up.
|