Your savings account interest is taxable income, but the tax you owe depends on how much you earned and what type of account you hold

The interest your bank pays you on a savings account counts as ordinary income to the IRS. That means you owe federal income tax on it at your regular tax rate — the same rate you pay on wages or salary. Most banks will send you a 1099-INT form each January if you earned $10 or more in interest during the previous year, and you report that amount on your tax return.

The actual tax you pay depends on your total income and tax bracket, not on the interest amount alone. Someone in the 22% tax bracket pays roughly 22 cents in federal tax for every dollar of interest earned. Someone in the 12% bracket pays roughly 12 cents. State and local income taxes may explore on top of that, depending on where you live.

The one major exception is a Roth IRA or Roth 401(k), where interest and investment gains grow tax-free and you owe no tax when you withdraw the money in retirement. A traditional IRA or 401(k) defers the tax until you withdraw — you do not pay tax on the interest while it sits in the account, but you pay ordinary income tax on the full withdrawal amount later.

Key Takeaways

  • Interest earned in a regular savings account is taxed as ordinary income at your federal tax rate, plus any state or local income tax that applies where you live.
  • Banks report interest of $10 or more on a 1099-INT form, which you receive in January and report on your tax return.
  • Roth IRAs and Roth 401(k)s allow interest to grow completely tax-free, with no tax owed on withdrawals in retirement.
  • Traditional IRAs and 401(k)s defer the tax until you withdraw the money, at which point the full amount is taxed as ordinary income.
  • High-yield savings accounts earn more interest than regular savings accounts, which means higher taxable income — the interest rate does not change the tax treatment.

How the IRS knows about your interest income

Your bank tracks every cent of interest it pays you and reports it to the IRS on a 1099-INT form. The bank sends you a copy and files another with the IRS. If you earn $10 or more in a calendar year, you will receive the form. If you earn less than $10, the bank may still report it to the IRS, but you will not receive a paper form — the IRS gets the information directly.

The IRS matches the 1099-INT against your tax return. If you do not report the interest income, the IRS will notice the mismatch and may send you a notice asking for the unpaid tax plus penalties and interest. Even small amounts add up over time, so it is worth reporting accurately.

Regular savings accounts versus tax-advantaged accounts

A standard savings account at a bank or credit union has no tax shelter. Every dollar of interest is taxable in the year you earn it. This is true whether the account earns 0.01% or 5% — the tax treatment stays the same; only the amount of taxable interest changes.

A high-yield savings account works the same way: the interest is taxable, but you earn more of it because the rate is higher. If you move $10,000 from a regular savings account earning 0.01% to a high-yield account earning 4.5%, you will earn roughly $450 more per year in interest — and owe tax on that extra $450.

Money market accounts and certificates of deposit (CDs) also report interest on a 1099-INT and are taxed the same way as savings accounts. The only difference is the interest rate and the terms of withdrawal.

Tax-deferred accounts: Traditional IRAs and 401(k)s

A traditional IRA or traditional 401(k) lets your savings grow without triggering a tax bill each year. If you earn $500 in interest in a traditional IRA, you do not report that $500 on your tax return that year. The money stays in the account, and the interest compounds without being taxed away.

The tax bill comes later, when you withdraw the money in retirement. At that point, the entire withdrawal amount — your original contributions plus all the interest and growth — is taxed as ordinary income. If you withdraw $50,000 from a traditional IRA, you owe income tax on the full $50,000, not just the interest portion.

This structure makes sense if you expect to be in a lower tax bracket in retirement than you are now. You avoid paying tax at your current (higher) rate and pay it later at a lower rate. It does not work as well if your retirement income will be similar to or higher than your working income.

Tax-free accounts: Roth IRAs and Roth 401(k)s

A Roth IRA or Roth 401(k) flips the tax timing. You contribute money that has already been taxed (you do not get a deduction), but then the interest and all growth happen tax-free. When you withdraw in retirement, you owe no tax on any of it — not on the interest, not on the gains, nothing.

This works best if you expect to be in a higher tax bracket in retirement or if you straightforward want the certainty of knowing your withdrawals will not be taxed. You pay the tax upfront, when you contribute, rather than later when you withdraw.

Roth accounts have income limits for contributions. In 2024, you cannot contribute to a Roth IRA if your income exceeds certain thresholds (the limits vary by filing status and change each year). A Roth 401(k) has no income limit, but your employer must offer one.

State and local taxes on savings interest

Federal income tax is only part of the picture. Most states tax interest income at their state income tax rate. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax at all, so residents owe only federal tax on savings interest.

Some states offer tax breaks for interest earned in certain accounts. For example, a few states exempt interest earned in IRAs or other retirement accounts from state tax. Check your state's tax authority website or speak with a tax professional to understand what applies where you live.

Local income taxes exist in some cities and counties on top of state tax. New York City, for instance, imposes a local income tax. If you live in a place with local tax, your total tax bill on savings interest includes federal, state, and local portions.

Reporting interest on your tax return

When you file your federal income tax return, you report interest income on Schedule B (if you have more than $1,500 in interest and dividends combined) or directly on Form 1040 (if you have less). The 1099-INT form tells you the exact amount to report.

If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add up all the interest from all the forms and report the total. If one bank made an error on the form, contact the bank to request a corrected form before you file.

If you earned less than $10 in interest across all accounts, you still owe tax on it, but you may not receive a 1099-INT. Keep your own records of the interest earned and report it on your return anyway.

Frequently Asked Questions

Do I have to report interest if I earned less than $10?

Yes. The $10 threshold only determines whether the bank sends you a 1099-INT form. You still owe tax on any interest you earned, even if it is $1. Keep your own records from your bank statements and report the amount on your return.

Can I avoid taxes by moving money between savings accounts?

No. Moving money from one regular savings account to another does not change the tax treatment — the interest is still taxable. The only way to avoid annual taxes on interest is to use a tax-advantaged account like a Roth IRA or Roth 401(k), which have contribution limits and may be able to access rules.

What happens if I do not report the interest income?

The IRS receives a copy of your 1099-INT and will notice if you do not report it. You may receive a notice demanding payment of the unpaid tax plus penalties and interest, which can be substantial. It is simpler and cheaper to report the interest when you file.

Is interest in a savings account taxed differently than interest in a CD?

No. Both are reported on a 1099-INT and taxed as ordinary income at your regular tax rate. The only difference is the interest rate and how long your money is locked up. The tax treatment is identical.

If I have a Roth IRA, do I ever pay tax on the interest?

No. Interest earned inside a Roth IRA grows tax-free, and you owe no tax when you withdraw it in retirement, as long as you follow the withdrawal rules. This is the main advantage of a Roth account over a regular savings account.