Discover How Taxes Can Affect Your Savings Account
The Internal Revenue Service (IRS) requires all interest earned in savings accounts, including those with high-yield rates, certificates of deposits, and money market deposit accounts, to be reported as taxable income on your tax return. Your bank will typically send you a 1099-INT form for any interest over $10, but you are responsible for reporting all interest income regardless of the amount received.
It's important to note that interest paid into your savings account during the tax year is considered taxable income, no matter if the money is kept in the account, transferred to another account, or withdrawn. Additionally, cash bonuses received for opening a savings account are also subject to income tax and must be reported on your 1099-INT form.
While interest in savings accounts is taxable income, it's only taxed on the amount received as interest and not the full account balance. For instance, if your account has $10,000 and earns $20 in interest, you are only taxed on the $20 earned, not the principal amount.
Individual retirement accounts (IRAs), such as traditional and Roth accounts, allow for tax-deferred earnings on savings, with taxes deferred until after retirement. However, traditional and 401(k) accounts require income tax payments upon withdrawal, while Roth accounts have already been taxed on the deposited money, allowing for tax-free withdrawals after age 59 1/2.
Your financial institution will send a 1099-INT form each year showing interest earned in the previous year, typically in late January. It's essential to report all taxable interest on your income taxes, including bonuses received for opening a new account, to avoid penalties or fees enforced by the IRS.
Keep in mind that these rules apply only to traditional or online savings accounts and not savings held in an IRA, as the interest on those accounts is tax-deferred until withdrawal. Despite the tax implications, comparing savings account interest rates can help you make the most of your savings.
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