Soaring interest rates have rekindled Americans’ penchant for fixed-income investments like bonds and money market funds, but experts warn that they should be prepared for the taxes.
To battle inflation, the Federal Reserve has raised its benchmark, short-term fed funds rate to target 5.25%-5.50%, from near zero at the start of 2022 and to the highest level in 22 years.
Higher rates hurt spenders who must pay more to borrow but are a boon to savers who receive a higher return on their money, especially with the economy uncertain and the stock market volatile. Money market fund assets, for example, grew to a record, topping $5.69 trillion in the first three months of this year, Fed data show.
That higher, steady and nearly riskless income may come with a price though: Come the new year, you may find yourself with a larger tax bill, experts say.
“On the one hand, it’s great news, you’re getting higher interest, but are you ready for a tax hit in April or sooner, if you have to make quarterly estimated payments?” said Rob Keller, tax partner at tax advisory firm KPMG.
Learn more: Best current CD rates
What are fixed-income investments?
Fixed-income assets are those with a regular, fixed payout such as savings accounts, money market funds, certificates of deposits (CDs), or government and municipal bonds. They are generally low-risk income generators.
In a balanced portfolio, they’re used to offset stock holdings, which are riskier and mostly generate…
