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Whenever you make money, the federal government tends to get in on the action by taxing your gains. That generally includes the interest you earn on your savings account. While the annual percentage yield (APY) on regular savings accounts is relatively low, it is considered taxable income by the internal revenue service (IRS). It’s possible to minimize paying taxes on interest with the help of certain tax-advantaged accounts used to fund retirement, healthcare, and education expenses. However, these accounts generally aren’t designed for general, short-term savings goals, like building an emergency fund or buying a new car.Here’s what you need to know about your savings accounts and taxes, and which accounts to consider when looking for tax advantages.
Do You Have to Pay Taxes on a Savings Account?
Generally, yes – but only on the interest you earn, not on the principle. To understand how savings accounts are taxed, it can help to understand how these accounts work.Savings accounts are accounts held at banks or other financial institutions that offer a secure place for you to hold your cash. Funds in savings accounts are federally insured up to $250,000 per depositor at insured banks and credit unions. Using a savings account allows you to separate your everyday spending money (kept in your checking account) from money that's meant for a later date, like an emergency or a vacation. Unlike most checking accounts, savings accounts also typically earn interest. While you do not pay taxes on the money you deposit into your savings accounts (you’ve likely already paid income taxes on those funds through withholding or making estimated tax payments), the interest you earn is another story. Since interest is income, it needs to get reported to the IRS, and you may have to pay income taxes on it. If the bank gave you a sign-on bonus for opening the account, that’s considered taxable income, as well.
Do You Pay Tax on Savings Account Interest?
Typically, yes. Any interest earned on a savings account is considered taxable income by the IRS and must be reported on your tax return. That includes interest earned on traditional savings accounts as well as high-yield savings accounts, certificates of deposits (CDs), and money market accounts. There are, however, some savings accounts that come with tax advantages (more on that below).Recommended: 7 Different Types of Savings Accounts
How Savings Accounts Are Taxed
The IRS considers interest you earn on a savings account to be taxable income, whether you keep the money in the account, spend it, or transfer it to another account. When the bank deposits the interest into your account, you will need to report that interest as income for that tax year. The IRS taxes interest based on your marginal income tax rate, which is calculated based on ordinary income. Therefore, the amount of tax you’re responsible for changes with your tax bracket.
Reporting Savings Accounts on Your Taxes
If you earn more than $10 in interest during the tax year, your bank will likely send you a form 1099-INT, which shows the amount of interest that you earned. Sometimes, it will be part of a larger statement from a broker.These forms typically go out in late January. In other words, you’ll get your 2024 1099-INT early in 2025. The amount of interest listed on this form is the amount you need to report as taxable income.
How to Pay Less Tax on Your Savings
The government generally likes to encourage savings, so it offers a number of tax-advantaged ways of doing so. Here’s a look at some of your options.
Traditional IRAs
Individual retirement accounts (IRAs) are personal retirement savings accounts that offer tax benefits and a range of investment options. There are no income limitations, but there are contribution limits: For 2025, the limit for adults under age 50 is $7,000, and for those who will be 50 or older by the end of the year, it’s $8,000.Traditional IRA contributions are made with before-tax dollars, which means they lower your taxable income in the year you make them. Once your funds are inside the IRA, you can invest them in stocks, bonds, and other investment vehicles. The rate of return you earn depends on the investments you choose.Unlike interest earned in regular savings accounts, you won’t pay taxes on this interest right away. The returns you make inside an IRA are tax-deferred. This means you won’t pay taxes on the interest (or the money you originally invested) until you withdraw funds, which you can do penalty-free after age 59 1/2. Recommended: Is Using an IRA to Pay Student Loans a Good Idea?
401(k)s
Traditional 401(k)s offer the same tax benefits as traditional IRAs, meaning contributions and earnings are tax-deferred. The main difference between these two types of retirement accounts is that employers offer 401(k)s, while individuals open IRAs (using brokers or banks).IRAs typically offer more investment options than 401(k)s. However, 401(k)s allow higher annual contributions. Individual 401(k) contribution limits are $23,500 in 2025, up from $23,000 in 2024.
Roth IRAs
Roth IRAs are similar to traditional IRAs in terms of contribution limits and investment options. The key difference: Contributions are made with after-tax dollars. This means that putting money into a Roth IRA doesn’t reduce your taxable income for that tax year. Withdrawals, however, are tax-free after age 59½. As long as you don’t withdraw the money early, you won’t pay tax on any interest or investment returns you earn in your Roth IRA account.Unlike traditional IRAs, Roth IRAs have income limits. For single filers in 2025, the limit is under $150,000; for married couples, the limit is under $236,000. If your modified adjusted gross income (MAGI) doesn’t hit those limits, you can make the full Roth IRA contribution.
529 Plans
If you’re looking to save for education-related expenses (such as tuition for elementary, middle, or high school, or for college) a 529 plan is a tax-advantaged option. With these plans, you contribute post-tax dollars into your investment account and then see your investments grow tax-free.When the time arrives to pay for qualified education expenses, the withdrawals you make from the account come to you tax-free. If you withdraw earnings from the account for a non-qualified expense, however, you must pay applicable taxes, as well as a penalty.Recommended: Analyzing the Cost of College Over Time
Health Savings Accounts (HSAs)
A health savings account (HSA) can help you save for healthcare expenses and also get some tax advantages. If you have an employer-sponsored account, your contributions are taken out of your paycheck before taxes. If you set up your own HSA, the money you put in is tax-deductible. Your HSA money can be invested in mutual funds, stocks, and other investment tools, and any growth is tax-free. As long as you use your HSA money for eligible medical expenses, you'll pay no taxes on withdrawals.To be eligible to open an HSA, you need to be enrolled in a high-deductible health insurance plan and not receive Medicare.
Municipal Bonds
Municipal bonds are used by state and local governments to fund projects, such as building new schools and other public infrastructure projects. When you buy a bond, you are essentially loaning money to the government for a set period of time. In return, you receive a nearly-guaranteed rate of return through interest payments twice a year. The interest paid on municipal bonds is generally tax-exempt from federal taxes and, if those bonds are issued by the state you live in, from state and local taxes as well.
The Takeaway
While savings accounts are not generally thought of as investments, you typically do earn money from them in the form of interest. The IRS considers the interest you earn on these accounts to be taxable income.There are some ways to minimize taxes on interest. Certain accounts, such as those created to promote saving for retirement, education, and medical expenses, often allow interest to grow tax-free and be withdrawn without tax penalties. However, these accounts typically have strict rules regarding when and how you can use the funds. Savings accounts, especially high-yield savings accounts, can still be useful for emergency savings and short-term savings goals.If you're interested in finding the best rate for your savings, Lantern by SoFi can help. With our online banking marketplace, it’s easy to compare high-yield savings accounts based on APY, fees, and balance minimums.Lantern can help you compare online savings accounts and find today’s best rate.
Frequently Asked Questions
Do I have to pay taxes for my savings account?
How much money can you have in your savings account without being taxed?
How can I avoid paying taxes on my savings account?
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About the Author
Austin Kilham
Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
