Nerdy takeaways
- You’re taxed on interest earned from savings accounts and certificates of deposit each year. CDs longer than one year are typically taxed on interest each year of the term.
- You can put savings accounts and CDs into tax-advantaged accounts, such as IRAs, but these tax shelters have more access limits and additional early withdrawal penalties than regular CDs.
- Having to pay taxes on your bank accounts’ interest isn’t a good enough reason to jump into tax-advantaged accounts. You risk getting much lower rates of return, losing free or easy access to your funds and otherwise disrupting your financial goals.
The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
How the tax on CD and savings interest works
The annual interest you earn from any bank account, including a CD or high-yield savings account (HYSA), is taxed at your ordinary income tax rate. It’s the same rate you pay on your work earnings because interest is treated as taxable income. If you earn at least $10 in interest annually, your bank or credit union will generally send you a tax form 1099-INT.
» Not earning much interest? Check out the best HYSAs and best CD rates
Your tax rate is determined by your income tax bracket, which is based on two things: Your total taxable income for the year and your tax status (single, married filing jointly, etc.). There are seven federal income tax rates ranging from 10% to 37%. The higher the rate, the lower your after-tax interest earnings.
For example, if you have a 4.00% annual percentage yield on a one-year CD and you’re in the 22% tax bracket, your CD’s rate of return might be 3.12% after federal taxes. There’s an additional tax if you’re in a state with state income tax.
🤓Nerdy Tip
Knowing your post-tax APY might be helpful for calculating future earnings, but don’t let taxes stop you from getting high-yield savings or CDs. High returns on your savings can help offset inflation.Post-tax APY calculator
Estimate the impact your federal income tax might have on your rate of return from a CD or savings account. This calculator excludes any state income tax.
Disclaimer: This calculator is for educational purposes only. Factoring in your full tax situation may generate different results.
What else to know about taxes on CDs and savings accounts
- Taxable interest is in Box 1 of Form 1099-INT. If multiple accounts pay you interest at the same bank, such as checking and savings accounts and CDs, you’ll only see and report the total interest from Box 1. (Interest from checking accounts is rare.) Credit unions pay dividends that are taxed exactly like bank interest on their savings accounts and CDs.
- You must report interest on your taxes even if you don’t get a Form 1099-INT or you earn less than $10. Banks typically mail out tax forms in January or February, months before the April tax filing deadline. If you receive bank statements electronically, log into your bank’s website or mobile app and look for the form in a tax documents section.
- This tax is only for interest earned, not the rest of the money in your bank accounts. Money you receive from other sources, such as an employer or your own business, has separate tax treatments and/or different tax forms, such as W-2s for employee wages and 1099-NECs for contractors.
- Interest income doesn’t have a favorable tax rate. CD or savings account interest doesn’t have the lower tax rate that certain investments do when sold after being held for more than a year (known as long-term capital gains tax). Investments in stocks typically have this benefit as well as a strong track record for higher average returns for long-term goals.
» Earned a bank sign-up bonus? See how that’s taxed
How multi-year CDs and CD penalties get taxed
Since CDs lock up your money for fixed term lengths, there are two other things to watch out for:
- You pay taxes on CD interest the year it’s earned, not when a CD matures. If you have a five-year CD, you’ll owe taxes for each of the five years, for the interest earned only in that year.
- You aren’t taxed on the amount you pay for a CD penalty. If you redeem a CD before the term ends, you’re charged an early withdrawal penalty. The amount is typically several months’ to a year’s worth of interest earned, though it can be more and even include part of the principal (or initial deposit). You can deduct the penalty amount from your gross income, which means you aren’t taxed on it but you do report it. The amount is in Box 2 of Form 1099-INT.
4 types of accounts reduce taxes but have opportunity costs
Individual retirement accounts that hold CDs and savings accounts, or IRA CDs and IRA savings accounts, provide tax benefits on interest and other money. Traditional IRAs can delay taxes on contributions and earnings until withdrawal, while Roth IRAs can have tax-free earnings. But there are penalties for excess contributions and early withdrawals before retirement age — on top of a CD’s regular early withdrawal.
Health savings accounts (HSAs) and 529 college plans are other tax-advantaged investment vehicles that can hold savings and CDs, but they have limits on what the money can be used for. HSAs allow untaxed dollars to pay for qualified medical costs. The student-targeted 529 plans typically have tax-free earnings, but this benefit only applies if withdrawals are used to pay for college tuition and other qualified education costs.
While you can reduce taxes on CDs and savings accounts by having them in IRAs, HSAs and 529 plans, these tax-advantaged vehicles aren’t meant for your everyday or emergency savings. They’re best for long-term savings that can benefit from a lower tax burden for retirement or specific types of purchases. They can invest in stocks, which have more risks than FDIC-insured CDs and savings accounts but also tend to have higher long-term average returns. Stock investments can also have lower tax rates. You don’t want to give up valuable space in your investments for CDs or savings accounts that might save you a little on taxes. Use tax-advantaged vehicles for the purposes they were designed for.
These tax shelters also have smaller pools of CDs and savings accounts, so you might miss out on the best rates in the market. Finding competitive rates on your savings can help you beat inflation.
Certified public accountant Christina Mehltretter recommends these priorities in order: Consider your money goals first, then risk tolerance and taxes.
“Don't forget about taxes because they're always going to come,” says Mehltretter, financial advisor and chief operating officer at Carolinas Financial and Retirement Planning. “But if you start with taxes, it might lead you down a path that doesn't really help an investor meet their ultimate goals.”
