How a .5% Interest Rate Cut Affects Your High Yield Savings Account
Plus becoming a dad!
You may have received an email from your bank last week saying your interest rate on your savings account was going down. That’s because the Federal Reserve decided to lower interest rates for the first time in four years. They dropped the federal funds rate by half a point (also known as .5% or 50 bps).
If you did not receive an email last week, your bank isn’t paying you any interest on your savings account cash to begin with.
With the potential of additional rate cuts looming on the horizon, I thought it would be prudent to write about what lower interest rates mean for your high yield savings account.
Less Income?
If your high yield savings account paid 4.4% and now pays 4.25%, you’ll make slightly less in interest income. If you had $10k in your account, your expected annualized interest income would drop by $15 ($440 to $425).
Your principal value will stay the same, but future interest payments will decrease. This is not always a bad thing! Making too much money from your bank interest (as well as investment dividends) can push you into higher tax brackets and over certain thresholds.
For example, if you and your spouse file taxes jointly and make $228,000 in salaried income in 2024, you would both be eligible to contribute to a Roth IRA. You both contribute the max for 2024.
Now let's say you had $100k earmarked for a house downpayment sitting in a checking account paying .01% interest. You wanted to earn a little more on your cash while you looked for the perfect home. You did some research and opened a 5% interest high yield savings account in Jan 2024 and transferred the $100k to it. If rates held at 5% all year, you’d make $5,000 in interest income, instead of the $100 your checking account was paying you before. Nice!
But hold on. Adding $5k to your taxable income would push you to $233,000 total. Guess what? You can’t contribute the maximum amount to a Roth IRA if your modified adjusted gross income is between $230,000 and $240,000, only a partial amount (no direct contribution allowed at all above $240k!). Now you’ll have to recharacterize your excess Roth contributions to a traditional IRA (Or figure out a way to lower your MAGI).
No custodian will warn you about this, it’s up to you to know the rules. If you make a mistake, you will find out when the IRS sends you an audit letter.
Your salary is not your only income if you invest. Interest, dividends and capital gains have a huge tax impact once your portfolio grows large. Staying on top of projections year-round is important. So is understanding your full financial picture. Every financial move you make has consequences.
It might suck having a lower rate on your cash going forward, but it’s not the end of the world. Maybe it will motivate you to invest more! Vanguard’s Total US Stock Market ETF (VTI) is up 19.6% year to date as of writing this1. That’s a lot more than your high yield savings account has gotten this year!
If you were wondering why I have not posted here for awhile, it’s because I became a dad! It’s the best.
I love writing this newsletter, but writing on no sleep proved difficult for me. I am excited to get back to writing more frequently now that sleep habits are forming!
If you want your personal finance questions answered in a future Mound Visits, comment below or send me an email at nick@nineinningfinance.com with your question/scenario.
Also please share this post with anyone you think might find it helpful.
Enjoy this photo my wife sent me of our son a few days ago when I was at my office beginning to write this post!
Nothing in this email is intended to serve as financial advice. I don’t know your personal circumstances and would never provide financial advice through this medium. This newsletter is intended to be educational and entertaining. Please consult a financial professional and do your own research before making any changes to your portfolio.
Investing comes with risk and your principal is not protected.