Impact of inflation and taxes on a fixed rate
MINT HILL, NC – With all this market volatility, have you thought, “Maybe I should put my money away in a safe, fixed-rate certificate of deposit (CD). In an uncertain economic environment, many consumers are looking for products like this. While benefits like short terms and a guaranteed interest rate can be attractive, two often overlooked factors can negatively impact a conservative fixed rate: taxes and inflation.
Many of us don’t think about the “real rate” of return, which has a major impact on fixed income vehicles. For example, in 2021, the average six-month CD rate was 0.09%. The lowest since 2000! Hypothetically, if we use the top marginal federal tax rate based on $100,000 of taxable income for a married couple filing jointly at 22%, along with inflation, the actual return on this CD would be -6, 93%. This may seem drastic, and keep in mind that the assumed tax rate will not apply to everyone. This example gives you a good idea of how things work though.
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This article was written by Sammons Retirement Solutions for your local Cambridge Investment Research financial advisor.
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