Savers who have relied on elevated interest rates in the past few years might face unexpected challenges, according to some financial experts.

Returns on savings could decline following the Federal Reserve’s recent interest rate reduction, and with the anticipated end of the Trump tax cuts next year, savers might also see increased taxes on any interest earned.

“An increase in income tax means you’ll take home less money,” explained Brian Large, a partner at Lenox Advisors. “With lower returns on cash, you’re seeing a decline in earnings, plus this low interest will be taxed at a higher rate. This situation will impact savers everywhere.”

Understanding the Trump Tax Cuts

Introduced in 2017, the Tax Cuts and Jobs Act (TCJA), commonly known as the Trump tax cuts, was the most significant alteration to the tax code in three decades. It encompassed extensive tax reductions for both businesses and individuals, many of which will cease to exist at the close of 2025.

A key change for Americans was the reduction in income tax rates. The highest bracket decreased from 39.6% to 37%, the 33% rate dropped to 32%, the 28% bracket was reduced to 24%, the 25% bracket fell to 22%, and the 15% bracket dropped to 12%. The lowest bracket remained at 10%, while the 35% rate stayed the same.

If these tax cuts are not prolonged, the affected tax brackets will revert to their previous levels before the TCJA.

“Ultimately, almost everyone will see an increase in their tax rate,” stated Mark Steber, chief tax officer at Jackson Hewitt.

Reasons Behind Falling Savings Rates

With inflation decreasing, the Fed is focused on maintaining a strong labor market.

Job growth has slowed this year as interest rates reached a 23-year peak, impacting economic activity and the rate of price increases. To stimulate the job market, the Fed cut its benchmark short-term fed funds rate by half a percentage point in September, marking its first reduction in over four years.

As a result, banks have quickly lowered interest rates on savings, money market accounts, and certificates of deposit (CDs).

With predictions of more rate cuts ahead, savers who were enjoying interest rates as high as 5% on cash deposits will likely need to seek alternative investment options for comparable returns, according to Large.

Strategies for Coping with Increased Taxes and Lower Interest Rates

• To prepare for potentially rising income tax rates in 2026, Americans should consider optimizing their earnings now by accelerating their income in 2024 and 2025, experts suggest.

For instance, retirees might want to withdraw a bit more than the minimum required distribution during these years, as suggested by Nayan Lapsiwala, director of wealth management at Aspiriant.

Additionally, some may look into a Roth conversion, allowing them to pay taxes at current lower rates and avoid taxes on withdrawals from Roth accounts later.

• With declining yields on traditional fixed-income investments like savings accounts, CDs, and bonds, experts recommend reallocating some cash into stocks.

Stocks generally offer higher returns than fixed-income investments, and these gains will be taxed at lower rates, according to advisers.

This is because the interest from fixed-income sources is taxed as ordinary income, while stock gains are subject to capital gains tax. Currently, capital gains rates for assets held for over a year vary from 0% to 20%, compared to income tax rates ranging from 10% to 37%.

Although investing in stocks does carry more risk, these risks can be managed by utilizing mutual funds or exchange-traded funds (ETFs) that encompass a variety of companies or sectors, advisers advise.

In a climate of falling interest rates, businesses benefit from reduced borrowing costs, particularly small and mid-size firms that often have greater growth potential and better financial outcomes for investors. Enhanced borrowing capability allows companies to invest in their operations, potentially leading to increased profits and superior stock returns, remarked Large.

Furthermore, money market funds hold a historic $6.42 trillion, as reported by the Investment Company Institute. As interest rates decrease, experts anticipate that investors will seek higher returns for these funds, favoring stocks in the process.

To reduce investment risk, one option is to purchase an index such as the Russell 2000, which comprises companies from various sectors, according to Large.

This strategy might not suit everyone, particularly retirees who require consistent income. In such cases, Daniel Milan, managing partner at Cornerstone Financial Services, recommends investing in high-quality, dividend-growing stocks. These dividends can provide a steady income stream while the stock value increases.

“The focus should be on the growth of dividends,” he stated. “To be beneficial, the annual growth of dividends should meet or exceed the inflation rate.” It’s important to know that dividends are subject to income tax unless the stocks have been owned for a specified minimum period, generally several months, at which point they may be taxed at the lower capital gains rate.

Milan advises looking for stocks that achieve 7% to 10% annual dividend growth while providing an average yield of 3.5% to 4% each year.