Money Management

Tired of paying a surprisingly high tax rate on your high-yield savings account interest? See how to minimize your taxes and keep more of your savings. [[{“value”:”

During the past few years of rising interest rates, high-yield savings accounts, CDs, and other interest-earning accounts have started paying higher APYs. And that’s a good thing for your savings: earning higher yield is always better than leaving your cash in a near-0% APY account.

But one slight downside of higher interest is that you have to pay taxes on it. The interest earnings on your savings account (or other accounts) are not “free money” — they’re taxable interest. Your bank will send you a 1099-INT form for you to report your interest income when you file your tax return.

Let’s look at a few reasons why you might get hit with a surprise tax bill because of higher-than-usual interest income from your savings account — and what to do about it.

Interest income tax is based on your marginal tax rate

Interest income is taxed as “ordinary income,” meaning that the IRS treats this money the same as if it was income from your job. But unlike your paychecks where you withhold tax every month, taxable interest income can come as a surprise at tax time. You might have a few hundred dollars or thousands of dollars of extra income that you hadn’t planned for.

Your savings account taxable interest will be taxed at your marginal tax rate (aka: your tax bracket). So if you had $10,000 in a high-yield savings account that earned 5.00% APY for all of 2023, that means you will have about $500 of taxable interest income. If you’re in the 22% tax bracket, you’ll owe about $110. That means you only get to keep $390 of your savings account earnings after taxes.

How to avoid tax on savings account interest

Is having a high-yield savings account still worth it if you have to pay so much tax on the interest? It depends on your personal finances and your tax bracket. Why are you keeping that cash in the bank? If it’s your emergency savings fund, just leave it alone and keep paying tax on the interest. A high-yield savings account is usually the best place to keep your emergency fund, because it’s easy to withdraw money when you need it, and you can still earn a higher yield than some of the best CDs.

But if you already have a healthy three to six months of emergency expenses saved up, and you’re in a higher tax bracket (like 22% or 24% or higher), you might be keeping “too much” cash in the bank. This is a good problem to have, but it’s still a problem.

Too much cash in the bank could mean that you’re not investing in the most appropriate way for your long-term financial goals. You could also be paying too high of a tax rate on your interest income, when you could minimize your tax bill with a few smart tax-planning strategies. Here are a few ideas to reduce the tax impacts of savings account interest.

1. Max out your 401(k)

Tired of paying taxes on savings account interest? Counteract that extra income by reducing your income in other ways — by maxing out your 401(k). The 401(k) is especially useful for higher-income employees, because there are no income limits on who can use it. And you can put $23,000 into your 401(k) for 2024 — and an extra $7,500 catch-up contribution if you’re age 50 and over.

2. Contribute to a tax-deductible IRA or health savings account

If you qualify for a tax-deductible IRA (there are some limits based on income, and on whether you or your spouse is covered by an employer retirement plan), you can use this as a great way to reduce your income for tax purposes. You can put up to $7,000 into a traditional IRA for 2024 (with an extra $1,000 catch-up contribution for the 50-plus cohort).

Do you have a high-deductible health plan (HDHP)? If so, your health insurance will likely make you eligible to use a health savings account (HSA). If you can, you should definitely put money into your HSA! There are no income limits for who can use an HSA; even higher-income people who don’t qualify for a traditional IRA can benefit from this useful tax break. Max out your HSA for 2024 with up to $4,150 of contributions for single coverage, or $8,300 for families.

3. Invest for long-term capital gains

Use your taxable brokerage account as an alternative to taxable interest. Instead of paying ordinary income rates on your savings account interest, put your extra cash into investments — and hold those investments for at least one year. That way, you’ll owe long-term capital gains tax — and for most people, the long-term capital gains tax rate is 15% (or even 0% for some lower-income taxpayers).

Bottom line

If you’re paying too much tax on your savings account interest, that’s ultimately a pretty good problem to have — but you always have options to be more tax-efficient with your savings. For people with extra cash savings whose marginal tax rate is higher than 15%, investing your extra cash in a brokerage account for the long term is often a smarter tax move than leaving your cash in the bank.

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Some digital nomads don’t keep good track of their finances. Find out about the consequences you could face if you don’t make a budget. [[{“value”:”

As a digital nomad, it’s easy to neglect planning a budget. When you’re traveling and seeing all kinds of exciting new places, you probably don’t want to spend much time analyzing your finances. It’s also more challenging to maintain a budget, since your expenses will change each time you move.

I’ve been a digital nomad, so I understand why budgeting may not be your No. 1 priority. But if you don’t do it, you could end up with some serious financial issues.

You’re more likely to overspend

A budget is a tool for managing your spending by figuring out how much you can afford to spend on your regular bills. If you don’t have one, there’s a good chance that overspending will be an issue.

For example, if you plan a budget, you may decide that you’ll spend no more than $400 per month at restaurants. This gives you a firm limit. If you start getting close to it, you can stop going to restaurants for the rest of the month. If you haven’t set any sort of limit, you’d have no reason to slow down your restaurant spending.

This is especially important for digital nomads because there’s more risk of overspending. Since you’re traveling and seeing the world, it can feel like you’re constantly in vacation mode. You’ll be spending more on travel, and you’ll probably also be tempted to go out for activities and meals more often than you would at home.

Planning for the future gets put on the back burner

Setting aside money for the future is one of the most important financial habits. A good rule of thumb is to save at least 10% of your income and invest another 10%. You can use the savings to build an emergency fund and sock away money for other upcoming expenses. Your investments are what you’ll use to eventually retire.

Sadly, many people are behind on their savings and investments. To give one example, the median savings account balance in the U.S. is $1,200. That’s well below the standard recommendation for an emergency fund of three to six months of living expenses.

And once again, the digital nomad lifestyle can make this even harder. Lots of digital nomads take the “live in the moment” approach. The ones who don’t make saving part of the game plan often end up living paycheck to paycheck.

It’s not good to live paycheck to paycheck anywhere. It’s more dangerous when you’re halfway around the world. You could lose your job or need to get back home at the last minute because a family member is in the hospital. In a worst-case scenario, an emergency fund helps relieve a lot of financial stress.

How to set up a simple spending plan as a digital nomad

If you’re a digital nomad, you might be thinking that you don’t want to spend a ton of time on a budget. I get it, and you don’t need to do that. I’m going to share a method that has worked for me and takes very little time.

Start by setting monthly savings and investing goals for yourself. If you’re like many digital nomads and have an income that goes up and down, percentages work great for this. You could commit to saving 10% of your income and investing 10%. If your income is fairly stable, you could also go with fixed dollar amounts, such as $500 or $1,000.

Next, figure out spending limits for your expenses. Here’s how to make this easier: Focus on the big costs. These are the ones that I watch most carefully:

RentGroceriesDiningTravel and activities

I recommend keeping your limits on these the same as you travel. After all, the cost of living will vary from place to place, but that doesn’t affect your income.

For example, let’s say you set a limit of $2,000 per month for rent. If you visit Southeast Asia, you’ll likely be able to stay well under that limit. In Western Europe, you’ll still have options, but you’ll need to be more selective. Your housing options will change, but your housing budget won’t.

Your budget doesn’t need to be extremely detailed and track every single coffee and bus ticket you buy. I recommend focusing on the items that make the most impact: your savings, investments, and the amount you spend on your major expenses. If you do that, you’ll be able to enjoy the digital nomad life while also managing your money well.

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Want to try “loud budgeting” to save money? See how much Gen Zers are saving with this “loud and proud” method to spend less and save more. [[{“value”:”

TikTok is not just a place to watch dance videos or see photogenic food and travel destinations; it can also provide some useful personal finance advice. Some of the biggest personal finance trends among Gen Z get their start on TikTok.

One of the best pieces of advice we’ve seen on TikTok — which really could make a big difference in your personal finances — is called “loud budgeting.” According to a recent survey from Clarify Capital, Gen Zers who use the habits and attitudes of loud budgeting save $629 per month on average!

Let’s look at what loud budgeting means for your personal finances and how you can use these tips to save more money in 2024.

What is loud budgeting and how does it work?

The idea of loud budgeting originated with a TikTok comedian named Lukas Battle, who invented the idea as a way to be loud and proud about managing your spending. Instead of being pressured into spending money or going out for expensive drinks and dinners when you don’t really want to, loud budgeting is about clearly stating your intentions and being deliberate about how you spend — or save.

Clarify Capital’s survey of Gen Z found that 20% of Gen Zers are aware of the concept of loud budgeting, but only 6% actually describe themselves as “loud budgeters” who use the method in their personal finances. However, Gen Zers who use loud budgeting are getting noticeable results — they’re saving an average of $629 per month.

How to save money with the top five loud budgeting habits

The Clarify Capital survey found that the following habits, beliefs, and behaviors are most associated with loud budgeting. Here are the most popular tips and tricks that help loud budgeters save money.

1. Review and adjust your personal finances regularly

This tip was mentioned by 51% of Gen Z loud budgeters. It’s important to understand the full picture of your personal finances, whether that means getting a budgeting app, or a credit monitoring service. Most banks now offer helpful digital banking tools via mobile app, so it’s easy to check your balance and watch out for future bills.

2. Make intentional choices to support your financial wellness

Almost half (47%) of Gen Z loud budgeting fans said that it’s important to be intentional about how you spend. Don’t just mindlessly “doom spend” or go shopping when you’re bored or lonely; try to be deliberate about how, when, and why you’re spending money.

Do you really want that expensive purchase, or would you feel better with money in the bank? What are you willing to go without today so that you could have an extra $1,000 in savings by the end of the year? Increasing your financial wellness is often a matter of feeling more in control of the choices you make. Loud budgeting can help you clarify your financial choices — with others, and with yourself.

3. Setting (and prioritizing) goals for your personal finances

Goal-setting was top of mind for 46% of Gen Z loud budgeters. What do you really want to do with your money? Are you spending in ways that matter to you, are you making progress toward the future, or are you feeling stuck — or worse, racking up too much credit card debt?

Personal finance goals are not just about spending and saving money. Your goals might include making some big career moves, like getting a pay raise or promotion. Having a vision for what you want to do with your money (and your life) can help you get motivated to make positive changes.

4. Planning for the short and long term

Loud budgeting helps you regain control of your time and make sure you have enough money not just for today or tomorrow, but for next month, next year, and beyond. And 40% of Gen Z loud budgeters said that they use proactive planning — short and long term — to get “loud” about their personal finances.

Short-term goals might include boosting your emergency fund or saving for a vacation, while longer-term goals might include saving for a down payment on a house and investing for retirement. If you want to have a strong financial foundation, it helps to put your money into a lot of different buckets at once. Every paycheck should ideally help you make progress toward multiple goals for different moments of your life.

5. Holding yourself accountable for spending decisions

A spirit of accountability is important to 37% of loud budgeters. With loud budgeting, you are declaring yourself in charge of your money — you are the leader of your life. But leaders have to be accountable. If you make a mistake, don’t beat yourself up about it, but take ownership and learn from it.

Bottom line

Loud budgeting has taken the world of personal finance by storm, and for good reason: it’s a powerful idea that’s easy to use. In a world where many Gen Z people feel overwhelmed by debt and have too little cash in the bank, loud budgeting can be an antidote to financial gloom.

You don’t have to be helpless or intimidated about money — there are great tools available to help you. The best budgeting apps can give you a clear vision of your monthly spending so you can save more money. The best high-yield savings accounts pay APYs of 5.00% and higher, giving you more motivation to save. Loud budgeting can help you feel more confident about your decisions, and build a brighter future for your personal finances.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
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Many Americans boosted their 401(k) contributions last year. Read on to find out how to increase yours if you’re falling behind. [[{“value”:”

Americans’ 401(k) balances grew last year, likely because the stock market gained more than 24% in 2023. But many people also increased contributions to their accounts, pushing their balances higher. That rise now means Americans in their 40s have an average of $100,300 in their 401(k)s.

With inflation still persistent, it can be difficult for many people to find extra money to put toward their retirement savings. If you’re falling behind with your own savings goals, there are a few things you can do to increase your contributions.

1. Put side hustle money into your retirement account

If you’re among the 39% of Americans with a side hustle, it may be a good idea to put that extra cash to work in your 401(k).

The average monthly earnings for side gigs is about $473, and the annual average rate of return for 401(k) is between 5% to 8%. If you put that extra money into your 401(k) for five years and earn an 8% return, you’d have an additional $33,298 in your retirement account over that period.

If you don’t have a side hustle, you may want to consider starting one. There are many excellent side gig platforms that can help you use your existing skills.

2. Sign up for your employer’s matching program

Many employers offer matching 401(k) contributions on a dollar-for-dollar basis, up to a certain percentage of your salary. This is one of the fastest ways to boost your 401(k) balance and has the potential to be one of the most lucrative.

For example, some companies offer matching contributions up to 6% of your salary. So, let’s say you earn $75,000 and contribute 6% of your salary throughout the year, putting $4,500 into your 401(k). If your employer has a 6% matching program, it would add $4,500 in contributions for the year as well, doubling your contribution amount.

With a deal like that, you’re leaving money on the table if you haven’t signed up for your employer’s matching program.

3. Put raises and windfalls into your 401(k)

Designating a specific percentage of your salary to 401(k) contributions ensures that your contributions will increase with each raise. But it’s also a good idea to put any unexpected windfalls into the account. If you get a bonus from work or a large gift from your family, putting some of that money into your 401(k) adds up fast.

Let’s assume you have $20,000 in your 401(k), which is earning an average annual rate of return of 8%. If you didn’t make any other monthly contributions to your account, you’d have an estimated $93,219 in 20 years.

But if you added a one-time additional investment account contribution of $2,000 to your initial $20,000 and let it grow over 20 years, you’d end up with $102,541.

Bottom line

Whether your 401(k) balance is ahead or behind that of other people in your age group doesn’t really matter. What’s important is that you contribute the right amount to your retirement goals.

A good rule of thumb is to aim to save 15% of your annual salary for retirement each year. If you’re not quite there yet, find a percentage you can afford and then automate those contributions so you’re consistently saving.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Paying taxes never becomes more enjoyable; however, there are breaks designed for retirees. Read on to learn about five of the most important. [[{“value”:”

Each day, more than 11,000 Americans turn 65. They’re not all planning immediate retirement, of course, but many are well on their way. Whether you’re newly retired or planning for retirement, understanding how taxes can impact your finances is an important step. Fortunately, there are tax breaks that you should never miss out on — the best tax software can help you claim these and more.

1. Extra standard deduction

Once you turn 65, the IRS provides an extra standard deduction. For the 2023 tax year, a single taxpayer can claim $15,700 instead of the $13,850 claimed by those under the age of 65. That’s a standard deduction increase of $1,850. Paying less in taxes means keeping more money in your checking account each year.

2. Spousal IRA

Normally, you must have earned income to contribute to an IRA. However, if your spouse is still working, you can contribute to a spousal IRA that is individually owned. That means that any money you contribute belongs to you, even if it’s your spouse earning the lion’s share. The IRS contribution limit for a spousal IRA in 2023 is $6,500. That limit will be raised to $7,000 for the 2024 tax year.

If you’re both over the age of 50, your total household contribution to an IRA cannot exceed $15,000 ($16,000 for 2024), but it’s nice to be able to contribute to your own account.

3. Solo 401(k)

There is no age limit on who can contribute to a Solo 401(k), so if you or your spouse own a small business with no employees, you can continue to contribute. While you’ll have to pay taxes on the funds when they’re withdrawn, contributions are made pre-tax, meaning you won’t have tax due this year on the income contributed to the retirement account.

Depending upon how much they earned in 2023, small business owners over the age of 50 can contribute up to $73,500 in pre-tax dollars.

4. RMD workaround

If you’re fortunate enough not to need the required minimum distribution (RMD) from a traditional IRA, consider transferring the cash directly to a charity. Thanks to the qualified charitable distribution (QCD), you can transfer up to $100,000 annually to an eligible charity and avoid paying taxes on it.

5. Medical, dental, eyecare, and hearing aid deductions

If your total medical expenses exceed 7.5% of your adjusted gross income (AGI) and you itemize your personal deductions, many of your medical and dental expenses are deductible. These include:

Medicare premiumsFees paid to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and nontraditional medical practitionersHospitalizationPrescription drugsInpatient treatment for alcohol or drug addictionAmounts paid for false teeth, reading or prescription eyeglasses, contact lenses, hearing aids, a guide dog or other service animal to help visually impaired or hearing disabled person, or a person with other physical disabilities, crutches, or wheelchairsWeight-loss programs for specific medical issues, including obesityLong-term care insurance premiumsNursing home careTransportation for essential medical care

This is not a comprehensive list, but gives you an idea of how many different services can be deducted. Say your AGI is $50,000 and your total medical expenses amount to $4,000. That means you’re above the 7.5% threshold and are eligible for the deduction ($4,000 ÷ $50,000 = 8%).

It may be tough to convince a 21-year-old of this, but aging does have its perks. While paying taxes is not necessarily one of those perks, taking advantage of tax breaks certainly is.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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