How Save investment returns are taxed and the benefits vs a typical savings account

Before you read on, please note that The Save Advisory Service does not provide comprehensive financial or tax planning or legal advice, and Clients are advised and afforded the opportunity to seek the advice and counsel of their own advisers. Neither Save Advisers nor any of its affiliates are responsible for determining any Client’s individual tax treatment regarding its Client Account. Furthermore, neither Save Advisers nor any of its affiliates are responsible for any state or federal income tax withholding, except as may otherwise be required by applicable law. Clients should take into consideration the limited nature of the Save Advisory Service in evaluating the investment advice and recommendations provided through the Site. 

Updated April 5, 2023.

The investments in Save portfolios are held for over a year so they are taxed as long-term capital gains.²  This makes filing the returns you earn, like the Market Savings APY,* on your Save portfolio very efficient and appealing for customers who care about after-tax outcomes.²

What are capital gains taxes?²  

Capital gains taxes² are broken up between two types: short- and long-term capital gains. When you buy and sell assets such as stocks for a profit, the IRS looks at the gains as taxable gains, but they’re taxed differently depending on how long you’ve held the assets.  

Breakdown: Capital gains taxes² 

Short-term capital gains mean you held the asset for less than a year and you’d be taxed at the same rate as you’d pay on your ordinary income, such as wages from a job. Whereas, if you held the asset for more than a year, which are long-term capital gains like Market Savings APY,* then your rates would be 0%, 15%, and 20%, depending on your income, which are typically much lower than ordinary income tax rates.² 

The following tables and graph show hypothetical tax situations to explain how Save portfolio returns would potentially be taxed.  

Assuming a marginal income tax of 28.40%, which is the average income tax for U.S. tax filers, and a long-term capital gain of 15%, the following scenario lays out the rate of return for regular savings accounts compared to Market Savings after taxes are factored in:  

The benefits after taxes are even better for higher-income earners. In this scenario, we’re assuming a marginal income tax of 45%, and a long-term capital gain of 20%, the following scenario lays out the rate of return for regular savings accounts compared to Market Savings after taxes are factored in:  

In comparison, interest from most bank accounts, including savings accounts (like the examples above), CDs, and money market accounts, are considered taxable income, which would have marginal tax rates according to your specific tax bracket. 

The after-tax return is slightly more beneficial for higher tax bracket earners when comparing the Market Savings returns to traditional savings accounts.  

Any capital gains applied to investments in your Save account will be reported on a 1099 for tax purposes. At the end of every calendar year, Save customers receive an email notification to advise of any tax forms available, and you can access these tax forms via your online portal or Save app. 

Additionally, our systematic portfolio rebalances do not create taxable events as they are indices, therefore, there is no need for tax-loss harvesting. Tax-loss harvesting allows you to sell investments that are down, replace them with reasonably similar investments, and then offset realized investment gains with those losses, however, this is typically very hard to execute well. 

Market Savings capital gains 2023 and beyond 

Now, let’s say you file your 2022 taxes by April 18 (that’s Tax Day in case it’s not already on your calendar, you’re welcome). What do you plan to do with your tax return? 

Obviously, we’re going to suggest you invest it in a Market Savings term to capitalize on the 8.26-9.18% APY,* depending on the term selected. Since the IRS began processing tax returns for 2022 on January 23, the average tax refund so far is $1,963, which is down 10.8% over 2022 refund totals, according to the IRS as of February 3. 

Assuming you round your refund to $1,900 and deposit it in a 1-year FDIC-insured Market Savings term, which averages 8.26% APY* as of publication, then upon maturity, you could earn $156.94.  

Remember, the Market Savings APY* is linked to an investment return. Just like any investment account, your returns are determined by market movements. The APY* presented is based on the hypothetical back-tested performance of the Save Moderate Portfolio with the understanding that in certain years the portfolio may have outperformed the APY,* and in other years it may have underperformed the APY* and even potentially returned 0%. 

If the Market Savings APY could earn 0%, you may be wondering why you would deposit in the first place and invest it in the market yourself. Of course, you could, but a big advantage with Save is that your principal isn’t at risk because your deposit is put in an FDIC-insured account† with our partners at Webster Bank, N.A., Member FDIC.  

Your Market Savings deposit is not encumbered, collateralized, or put at risk in the market. Save does not utilize your deposit for anything else aside from placing it with Webster Bank, N.A., Member FDIC, to ensure capital protection.†  

Independently of your deposit, Save makes an investment on your behalf based on your portfolio allocation. When you open your account with Save, you’ll use the Recommendation Tool to choose the portfolio best suited for you. 

Plus, we only charge a fee when you earn returns. When you do get returns, the management fee is 0.35% of the investment exposure. If your returns are less than 0.35%, we do not collect our management fee. This means we are fully aligned with our customers because their success is our success.  

“We thrive only when there is strong performance, and our customers are happy,” said Adam Watts, COO and President of Save. “We believe that it’s the right thing to do and it’s also ultimately better for our business: because we want our customers to stay with us and keep growing their savings for years to come.”