Affiliate links for the products on this page are from partners that compensate us (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate tax products to write unbiased product reviews.
- Instead of spending interest from my savings account, I save it for my tax bill.
- I like putting money in CDs, and one option that will help long-term with taxes is a SEP IRA CD.
- I pay attention to when my CDs will mature so that the tax impact is spread out between years.
For a decade, one of the biggest financial mistakes I made was keeping all of my cash in a savings account with a poor interest rate. I earned very little interest every year and missed out on the potential for that idle money to grow exponentially.
In 2022, I decided to actively optimize where my cash was sitting at all times. I started moving money between high-yield savings accounts, CDs, and other passive income-earning investments like REITs and dividend stocks.
I went from earning a few hundred dollars to a few thousand dollars a year in interest. While it felt nice to make money without having to do much or take big risks, there was a catch. Interest and earnings from savings accounts, CDs, and other investments are considered taxable income.
At first, I didn’t realize that, and I spent a lot of this passive income on vacations, building my business, and paying off my credit cards. But after getting hit with a big tax bill in 2023, I decided to be more strategic about the tax implications that come from moving money between accounts to optimize interest. Here’s how I planned for my 2023 tax bill.
1. I don’t spend the interest as soon as I get it
When my accountant shared how much I owed in taxes for 2022, I was sure she had made a mistake. But she mentioned that a reason my bill was so high was because I earned a lot in interest from my high-yield savings account and didn’t pay any taxes on that income throughout the year.
Since most of that money was spent or reinvested into my business, I decided that I wouldn’t touch that money until after tax season ended. That helped me reframe my finances. Instead of thinking I have a few thousand dollars to spend throughout the year, I don’t account for those earnings as part of my overall net worth. Instead, after paying my taxes, I reassess how much money of interest income I actually made and decide how to use the cash then.
2. I use the interest to pay my taxes
As a solopreneur, I pay both corporate and personal taxes every year. While my accountant and I do a good job of withholding money from each of my paychecks for taxes, paying quarterly taxes, and estimated tax payments, I still have a tax bill that’s a few thousand dollars, or more, every year.
Since I don’t like to tap into my personal savings to pay off this tax bill, I often consider the interest and earnings I’m making from my money movement strategy and passive income investments as means to cover my tax bill. I now wait to spend that money until after I know how much I owe in taxes and often use at least half of that money to cover the full bill.
3. I buy some SEP IRA CDs
Keeping cash in high-interest-earning CDs is a major part of my money strategy. When I have extra money coming in from a good month of work or one of my high-yield savings accounts drops the interest rate, I’ll put that money in various types of CDs.
One CD that has tax benefits is a SEP IRA CD, which is considered a retirement investment account. Any interest gained from money in this CD remains tax deferred until distributions are made at retirement. However, unlike a regular CD, CDs in your retirement fund have contribution limits set by the IRS.
4. I’m strategic with short-term CDs
As a solopreneur, my income varies quite a lot throughout the year. Around November, I’ll chat with my accountant, and if I’m having a higher income year than usual, I’ll plan for that to lower my overall tax bill. One strategy I have used in the past is to buy a short-term CD that doesn’t come due until January or February of the next year. This helps defer taxes on that money until the next year when taxable income might be lower.
