In a remarkable shift in financial preferences, US bank deposits have seen a significant reduction, with a staggering $397 billion exiting the banking system this year alone.
This trend, documented by the Federal Reserve Economic Data (FRED), highlights a movement towards money market funds, driven by their appealing high interest rates in the current economic climate.
Investors have been drawn to money market mutual funds in 2023, enticed by rising interest rates. However, this shift could lead to unexpected tax implications.
Certified Financial Planner Robert Schultz, from NWF Advisory Group, warns that investors accustomed to negligible tax bills on cash assets might face a substantial increase due to the 5% rates.
The drop in bank deposits, from $17.736 trillion at the beginning of the year to $17.339 trillion by November 22nd, mirrors the surge in money market fund investments.
The Investment Company Institute (ICI) reports a record inflow of $5.836 trillion into these funds as of November 29th, with retail investors contributing $2.245 trillion and institutional investors adding $3.590 trillion.
This dramatic increase in money market fund investment is attributed to their higher interest rates, which currently stand at up to 5.13%, significantly surpassing the national average annual percentage yield (APY) of 0.56%. These yields are in line with the federal funds rate, currently at 5.33%.
As the financial landscape evolves, with money market funds emerging as a preferred investment vehicle, investors are urged to stay aware of the potential tax implications and to plan accordingly for the upcoming tax season.