That’s what a 4% taxable yield leaves a high earner in Connecticut, New York or New Jersey after federal income tax, the Net Investment Income Tax and state tax.
September inflation was 3.7%.
An investment that looks like it earns 4% loses approximately 1.4% of purchasing power every year after taxes and inflation. If your low-risk investment is losing money, it should either be spent or the strategy should be reevaluated.
A financial advisor and a couple in their 50s reviewing printed documents at a conference table, laptop open, notepad and coffee cups visible, bright modern office with large windows
The tax bill
For high earners, the 32% federal bracket starts at about $202,000 of taxable income for single filers and $404,000 for joint filers. Investment income is subject to the 3.8% Net Investment Income Tax. For high earners in the tristate area, including state tax the combined rate is 42% to 43%. New York City residents pay an additional 4% more.
A 4% money market or bond yield becomes 2.1% to 2.3% after taxes.
The Typical Answer: Go Long. But Longer Can Be Wrong
One response is to buy a longer bond and lock in a higher yield. That brings duration risk. If rates rise another 50 basis points:
5-year bond: drops 2.2%
10-year bond: drops 3.8%
20-year bond: drops 5.7%
A modest move in interest rates can lose a substantial portion of the year’s interest income. If the bond is held to maturity, the interim loss is irrelevant. But you’re locked into yesterday’s rate while new bonds pay more.
The default longer term bond isn’t free of risk, it has three problems: annual taxes, negative real returns, and duration risk.
These are alternative ways to structure your investments.
1. MYGAs: A Time Deposit With the Tax Deferred
A Multi-Year Guaranteed Annuity pays a fixed rate for a fixed term. It’s issued by an insurance company. Some five-year MYGAs pay about 6% right now.
The interest compounds tax deferred as opposed to the year it accrues. At a 42% to 43% tax rate on withdrawal, a 6% five-year MYGA earns .17% more per year due to the tax-free compounding.
The tax power dynamic flips as the investor, control when taxes are paid. Withdrawal can be delayed until you are in a lower tax bracket or after a move to a lower-tax state. Until then, the whole balance keeps compounding.
The trade-offs: liquidity is limited, surrender charges apply, withdrawals before age 59½ can trigger an IRS penalty, and the guarantee depends on the insurer’s financial strength. State guaranty associations offer limited protection, subject to state limits.
For money that will sit for five years, it’s worth comparing to traditional taxable fixed income.
2. Structured Income Notes: Getting Paid for Volatility
A bond only pays interest. A structured income note pays three premiums: interest rates, equity volatility, and the correlation between equity indexes.
When rates and volatility are high, coupons go up. Depending on the indexes and terms, current notes pay 10% to 12% a year. Principal is protected unless the indexes at maturity are below the barrier, usually around 30%.
Know what you own:
You’re exposed to the worst performer. Lower correlation among the S&P 500, Nasdaq 100 and Russell 2000 increases the coupon.
Below the barrier, the loss is yours. With a 30% barrier, if the worst index finishes down 35%, you’re down 35%.
Issuer credit risk. It’s an unsecured obligation of the issuing bank.
Liquidity is limited. Plan to hold until maturity or call.
The choice isn’t 4% or 11%. The question is whether 11% pays you enough to take equity risk that includes a contingent 30% cushion.
3. RILAs: Equity Upside, a Buffer and Tax Deferral
A Registered Index-Linked Annuity ties your return to an index such as the S&P 500. There is downside protection and a cap limiting the return. Growth is tax-deferred.
A buffer is not a barrier. A barrier protects principal until a set level is breached, and then you take the full loss. A buffer absorbs the first part of every loss. With a 10% buffer, an 8% drop costs you nothing. A 25% drop costs you 15%.
Higher rates and higher volatility improve the terms. A standard one-year segment with a 10% buffer offers a cap of about 17%. Gains are one for one with the index, up to the cap, and the insurer absorbs the first 10% of any decline. A Dual Step Up Trigger segment earns about 8.5% for the year if the S&P 500 finishes at or above 85% of its starting level. The market can fall 15% and still earn 8.5%. If it falls 25%, the 15% buffer limits the loss to 10%.
Buffers, caps, indexes and segment designs vary a lot. The same caveats as MYGAs apply: surrender periods, the 59½ rule, insurer credit, and complexity.
Sometimes the Answer Is Where You Hold the Bonds
Asset location is just as important as asset allocation.
A 60/40 portfolio shouldn’t mean every account has to be 60/40. If you have both taxable and retirement accounts, put more of the bonds in the IRA and more of the equities in the taxable account.
Same 60/40. Same risk. Less tax.
The Bottom Line
High rates are good for savers. But for high earners, taxable fixed income is one of the least efficient places to invest net of taxes and inflation.
Before the next dollar goes into fixed income, ask three questions:
What do I keep after federal, state and NIIT?
What happens if rates rise another 50 basis points?
Can I defer the tax, cut the duration risk, or earn a higher yield for risk I already take?
The answer might still be a bond. But “it yields 4%” is not enough to decide.
The yield is the headline shown, not what matters most.
For educational purposes only. Not tax, legal, or investment advice. Tax rates, inflation figures and after-tax calculations are approximate and vary based on income, residence, account type and individual circumstances. Product rates and terms are current examples and change often. MYGAs and RILAs are insurance products whose guarantees depend on the claims-paying ability of the issuing insurer. Structured notes carry issuer credit risk and can result in substantial loss of principal. Review the specific terms, tax consequences, liquidity restrictions and risks before investing.
By ira
October 15, 2026
