She Redirects Savings Into Treasuries for Higher Yield, but $10,074 More of Her Social Security Becomes Taxable

Quick Read

• Moving $250,000 into Treasuries at 5% generates $12,500 in interest, but it can also cause an extra $10,074 of Social Security benefits to become taxable.

• The IRS combined income formula uses adjusted gross income plus half of Social Security benefits, and once single filers get above $34,000, as much as 85% of benefits can be taxed.

• To compare options, run the IRS worksheet twice: once before the new interest is added and once after, then weigh the after-tax yield.

A 10-year Treasury yielding 5.0% can look irresistible to a retiree with $250,000 in a bank account. With the national average 12-month CD paying only 1.8%, shifting the money may seem straightforward.

For someone collecting Social Security, however, interest has two effects. It is taxed on its own, and it can also increase the share of monthly benefits that becomes taxable. For a retiree with a sizeable nest egg, that means an appealing Treasury return can come with a larger-than-expected tax bill.

What $250,000 Can Produce at Current Yields

Yields close to 5% are mostly available in longer maturities. The 7-year Treasury is yielding 4.9%, the 20-year is at 5.35%, and the 1-year is paying 4.4%.

At a 5% annual yield, $250,000 would produce about $12,500 a year if held to maturity. The exact amount and timing of taxable interest depend on which securities are purchased and the price paid. Treasury interest is generally free from state income tax, but it remains subject to federal tax.

Combined Income Determines How Much of a Benefit Is Taxed

The IRS uses a calculation often called combined income. It includes adjusted gross income, any tax-exempt interest, and half of Social Security benefits. If that total exceeds $25,000 for single filers, or $32,000 for married couples filing jointly, part of the benefit becomes taxable.

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Once combined income rises above $34,000 for single filers, or $44,000 for married couples filing jointly, up to 85% of benefits can be counted. Tax-exempt municipal bond interest still enters the formula, so moving money into munis will not keep that income out of the calculation.

How $12,500 of Interest Pulls $10,074 of Benefits Into Taxable Income

Consider a single filer receiving the typical retirement benefit of $2,071 a month after the 2026 cost-of-living adjustment. That adds up to $24,852 a year. She also withdraws $20,000 a year from her IRA.

Before the Treasury purchase, her combined income is $32,426. Using the IRS worksheet, $3,713 of her benefits are taxable.

After adding $12,500 of interest, combined income climbs to $44,926.

That pushes taxable benefits to $13,787, an increase of $10,074. In effect, each dollar of interest brings roughly 80 cents of benefits into taxable income as well.

The 50% and 85% thresholds determine how much of the benefit is treated as income, while the tax bracket determines the actual tax owed.

For 2026, the 12% federal bracket for a single filer applies to taxable income above $12,400 and up to $50,400.

At age 72, she qualifies for the larger standard deduction available to single filers age 65 and older, along with the new $6,000 senior deduction if she meets the income limits. Under 2026 rules, her taxable income would be about $22,137 after the Treasury interest and the newly taxable Social Security benefits are included.

That would create roughly $2,408 in federal income tax, compared with no tax in the original scenario. About 19% of the $12,500 in interest goes toward the extra federal tax, leaving an effective yield of around 4% before any other costs or adjustments.

Why IRA Withdrawals and Interest Compete for the Same Tax Space

Every dollar withdrawn from her IRA feeds into the same calculation as the interest. Once required minimum distributions begin, those mandatory withdrawals can push her further into the range where benefits become taxable, even without any new investments. The extra standard deduction for filers 65 and older can reduce the bill, but it does not change how much of the benefit counts as income. This Social Security clawback is one of nine IRS rules that can quietly drain retirement accounts, all mapped in our free tax trap guide.

Her income is still well below the $109,000 threshold for Medicare surcharges in 2026. Medicare typically uses income from two years earlier to set premiums, so a large increase now could influence a future bill. In this case, though, the immediate issue is how much of her Social Security becomes taxable.

Check the After-Tax Return Before Moving a Large Cash Position

Before shifting the money, run the IRS worksheet twice: once using your current income and once with the added interest. Then compare the after-tax yields on the options you are considering.

Timing can also help. Treasury bills pay interest at maturity, so a bill purchased in one year and maturing the next moves that income into the following tax return. Longer bonds lock in both the income stream and the tax effect for years, while spreading purchases across maturities can make it easier to adjust if IRA withdrawals or benefits change.

Every return is different. Filing status, deductions and the mix of income can all change the result, so use the example here as a starting point for your own calculations.

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If you’ve saved over $1,000,000, this guide is for you. The last thing you want in retirement is to run out of money, you want your money to generate lasting income while you enjoy your life.

Now you can learn the strategies wealthy retirees use to fund their retirement with The Definitive Guide to Retirement Income from Fisher Investments. Download the guide today! (sponsor)