How to Calculate GRAT Savings vs. CD Interest Tax Drag on $2.5M in September 2026: The 4.6% IRS 7520 Rate Formula
The $2.5M sitting in a CD that's quietly losing the estate planning race
Here's a scenario that plays out in a lot of high-net-worth households right now: you've got $2.5 million parked in high-yield CDs or savings accounts, earning a respectable 4.5% APY. It feels safe. It feels smart. And according to NerdWallet's breakdown of how CD and savings interest gets taxed, every dollar of that interest is taxed at your ordinary income rate — not the 15-20% you'd pay on long-term capital gains, but your full marginal rate plus the 3.8% Net Investment Income Tax if you're above the threshold.
Meanwhile, that same $2.5 million could be funding a Grantor Retained Annuity Trust (GRAT) right now, at September 2026's IRS Section 7520 rate of roughly 4.6%. If the underlying asset — a concentrated stock position, a business interest, anything with real appreciation potential — grows faster than that hurdle rate, the excess passes to your heirs completely free of gift and estate tax.
Same $2.5 million. Two completely different outcomes. Let's actually run the math instead of guessing.
Why "just leave it in the CD" isn't actually the safe choice
The NerdWallet piece on savings and CD taxation makes a point that gets lost in estate planning conversations: interest income has no basis, no step-up, and no preferential rate. Unlike appreciated stock — where step-up in basis at death wipes out unrealized capital gains for your heirs — cash sitting in a CD gets hit twice. First, it's taxed as ordinary income every single year you hold it. Second, whatever's left is still sitting in your taxable estate, fully exposed to federal (and possibly state) estate tax at death.
That's the hidden cost most people never calculate. Let's fix that.
After-tax CD yield formula:
After-tax yield = APY × (1 − marginal federal rate − NIIT rate)
At a 37% top federal bracket plus 3.8% NIIT, that's:
4.5% × (1 − 0.408) = 2.664% after-tax yield
Run $2.5M at that after-tax rate for three years:
$2,500,000 × (1.02664)³ = $2,705,246
That's $205,246 of after-tax growth. If that growth stays in a taxable estate above the federal exemption, it takes another 40% haircut at death:
$205,246 × 0.40 = $82,098 in estate tax
Net to heirs from the CD strategy: $123,148 on the growth portion alone.
The GRAT alternative: the formula estate planners actually use
A zeroed-out GRAT works by setting an annuity payment (returned to you, the grantor) such that the present value of those payments — discounted at the 7520 rate — equals the amount you put in. Anything the trust earns above that hurdle rate passes to your beneficiaries with little to no gift tax cost.
Zeroed-out annuity formula:
A = V₀ ÷ [(1 − (1+r)⁻ⁿ) ÷ r]
Where V₀ is the funding amount, r is the 7520 rate, and n is the term in years.
Plugging in $2.5M, r = 4.6%, n = 3 years:
(1.046)³ = 1.144445 → (1.046)⁻³ = 0.873788 (1 − 0.873788) ÷ 0.046 = 2.743739
A = $2,500,000 ÷ 2.743739 = $911,279 per year
Now simulate the trust forward assuming the underlying asset grows at 10% annually (a reasonable assumption for a concentrated equity position or growth-stage business interest):
| Year | Value before payment | Annuity paid | Ending value |
|---|---|---|---|
| 1 | $2,750,000 | $911,279 | $1,838,721 |
| 2 | $2,022,593 | $911,279 | $1,111,315 |
| 3 | $1,222,446 | $911,279 | $311,168 |
That $311,168 passes to your heirs with essentially zero gift or estate tax cost.
Compare the two growth outcomes on the same $2.5M:
| Strategy | 3-Year Growth Kept by Heirs | Tax Drag |
|---|---|---|
| CD/Savings (4.5% APY) | $123,148 | Ordinary income tax + 40% estate tax |
| GRAT (7520 rate 4.6%, 10% growth) | $311,168 | ~$0 (zeroed-out) |
That's a $188,020 difference on the growth of the same $2.5 million, over just three years. This is the kind of analysis Voritanel runs for you — so you don't have to build the spreadsheet yourself.
Why this week's rate volatility actually matters to your number
Here's where it gets interesting. NerdWallet's mortgage rate coverage this week showed real volatility: rates rose earlier in the week as markets priced in a possible Fed hike on hawkish Fed commentary, then eased slightly by Friday, September 4, as markets reconsidered those odds. The BLS's latest read — CPI up just 0.1% in July, unemployment at 4.1% in August, payrolls up 162,000, average hourly earnings up only $0.10 — paints a cooling-but-not-collapsing labor market, which is exactly the kind of mixed data that keeps the Fed (and the 7520 rate, which tracks Treasury yields) bouncing around month to month.
Why does that matter for your GRAT? The 7520 rate is published monthly and locked in at funding. Run the same $2.5M, 3-year, 10%-growth GRAT at three different rates to see the swing:
| 7520 Rate | Annual Annuity | Remainder to Heirs (tax-free) |
|---|---|---|
| 4.0% | $900,908 | $345,494 |
| 4.6% (this month) | $911,279 | $311,168 |
| 5.2% | $921,343 | $277,855 |
That's a $67,639 swing on just $2.5 million from rate movement alone — and this is a much smaller estate than the $10M-$20M scenarios where we've seen rate jumps cost GRATs $613K or more. Higher rates mean higher required annuity payments, which leaves less time value for the trust to compound before payments claw it back. If you're watching mortgage rate headlines for personal reasons anyway, you should be watching the 7520 rate for the same reason — it's derived from the same Treasury yield curve. You can model this for your specific situation at Voritanel.
Reframing your "savings rate" as a wealth transfer rate
NerdWallet's piece on personal savings rate defines it simply: the percentage of income you set aside relative to what you earn. It's a useful mental model — and it maps almost perfectly onto a metric estate planners rarely name explicitly: your wealth transfer rate.
Wealth transfer rate = (Annual tax-free gifts + trust-sheltered growth) ÷ Net worth
If you're gifting $19,000 per recipient under the annual exclusion (confirm the current-year figure, since it's inflation-indexed) but your net worth is growing 8-10% a year through appreciating assets sitting in your own name, your wealth transfer rate is effectively negative — your estate is growing faster than you're moving assets out of it. That's the same math failure as a household with a 25% income but a 2% savings rate: the gap between what's coming in and what's actually being set aside determines whether you hit your goal.
The fix isn't necessarily "save more" — it's structuring vehicles (GRATs, IDGTs, annual exclusion gifts layered with trust funding) so growth happens outside the taxable estate rather than inside it, compounding against you.
When the CD actually is the right call
None of this means CDs are wrong. If you need liquidity within 1-3 years, if your total estate is comfortably under the federal exemption (currently in the $13.6M-$15M range depending on final 2026 legislative treatment — worth confirming with current IRS guidance), or if you don't have an asset with credible appreciation potential to fund a GRAT, a CD's simplicity and FDIC insurance are genuinely valuable. A GRAT that underperforms its hurdle rate returns nothing extra to heirs — you've paid legal setup costs for a wash.
The 5-question decision framework we've used for estates between $5M and $27M still applies here: How much is above the exemption? What's the asset's realistic growth rate versus the current 7520 rate? Do you need income during the trust term? Is portability simpler for your situation? And critically — what does waiting even one more month cost you if rates move against you, a question we've quantified before in what a 12-month delay costs a $10M estate.
Run your own numbers before the rate changes again
The 7520 rate updates monthly. The Fed's next move is still genuinely uncertain based on this week's mixed data. And the $188,020 gap in our example scales dramatically with estate size — on $10M or $20M, the same vehicle-choice mistake compounds into six figures, sometimes seven.
Your marginal tax rate, your asset's real growth trajectory, your state's estate tax threshold, and this month's exact 7520 rate are all inputs only you can supply accurately. Plug your actual numbers into Voritanel and see which side of this math you're really on — before another rate cycle changes the answer for you.
Sources
- Interest on CDs and Savings Accounts is Taxable. Here’s What To Know — NerdWallet
- What Is a Savings Rate? How to Find Yours and Why It Matters — NerdWallet
- Mortgage Rates Today, Friday, September 4: A Little Lower — NerdWallet
- Major Economic Indicators Latest Numbers — Bureau of Labor Statistics
- Mortgage Rates Rise This Week as Markets Anticipate Fed Hike — NerdWallet