Is interest from a savings account taxable?
One of the best ways to grow your savings is by placing money in an interest-bearing savings account. However, it’s important to know that the interest earned from certain types of savings accounts is taxable. How much interest on a savings account is taxable will depend on the type of savings account.
According to the Internal Revenue Service (IRS), taxable interest includes interest on bank accounts, money market accounts, certificates of deposit, corporate bonds, and deposited insurance dividends. Nontaxable or excludable interest may include interest redeemed from Series EE and Series I bond issued after 1989, and interest on some bonds used to finance government operations and issued by a state. This interest may not be taxable but must be reported to the IRS.
At Credit Union of Southern California (CU SoCal), we make getting a savings account easy.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.
Get Started on Your Checking Account Today!
What are savings accounts and how do they work?
Savings accounts were created to help people keep the money they use to pay bills separate from the money they save. This is why savings accounts are typically used for saving money, whereas checking accounts are used for paying debts.
Savings accounts are worth having, especially if you can get one that pays interest on the account balance. Savings accounts can help you build your wealth and save for retirement. There are different types of savings accounts, and some pay more interest than others. The type of account you choose should be based on your income, age, projected retirement age, monthly debts, and your financial goals.
What kind of savings accounts are tax-advantaged?
If you are looking for tax-deferred savings accounts, it’s important to note that while some accounts grow tax-free, the savings account interest will be taxed when you withdraw funds from the account. These are among the most popular tax-advantaged accounts:
Individual Retirement Accounts (IRAs). Also called traditional IRAs, the tax benefit of a
traditional IRA is related to the amount of the contribution. This is why many people contribute to an IRA at the end of a tax year, to reduce their taxable income. Because the IRA contributions come with a tax benefit at the time of deposit, income tax must be paid when the money is withdrawn during retirement. Anyone can open a traditional IRA, regardless of their income.
Roth IRAs.
Roth IRAs are funded with after-tax dollars (meaning earnings that have already been taxed). As a result, your account will grow tax-free, and you will not need to pay tax in retirement when you withdraw the money. Roth IRA holders can make tax-free and penalty-free withdrawals after age 59 and one-half.
401(k)s. A 401(k) is only offered through an employer. A 401(k) allows employees to contribute a portion of their wages to individual accounts. Employees make elective pre-tax contributions. There are no income limitations to participate in an employer’s 401(k). Because 401(k) contributions are made with earnings that have not yet been taxed, tax will need to be paid upon retirement when the funds are withdrawn from the account.
Health Savings Accounts (HSAs). An HSA is a type of savings account you can set up to pay certain health care costs. An HSA allows you to put money away and withdraw it tax free, if you use it for qualified medical expenses, like deductibles, copayments, coinsurance, and more.
529 college savings plans. According to the U.S. Securities and Exchange Commission, a 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. There are two types of 529 plans: education savings plans and prepaid tuition plans.
How to file taxes for your savings accounts
Is savings account interest taxable? According to the Internal Revenue Service (IRS), most interest you receive or that is credited to an account that you can withdraw from without penalty is taxable income in the year it becomes available to you. However, some interest you receive may be tax-exempt. You should receive Copy B of
Form 1099-INT or
Form 1099-OID reporting payments of interest and/or tax-exempt interest of $10 or more.
Do you need to report interest income under $10?
Technically, all interest earned on a savings account should be reported to the IRS, even if it is under $10. Financial institutions are only required to send form 1099-INT to their account holders who earned $10 or more in interest. If you earned less than $10, your financial institution may not send you the form; however, you are still responsible for reporting the earned interest, no matter how small the amount. You can find the amount of earned interest on your bank statements.
How do I keep track of my savings account interest earnings?
Savings accounts earn interest every day; however, each financial institution sets a policy for when interest is paid into accounts. This means your interest may be paid into your savings account monthly, quarterly, or annually. To track your savings account interest earnings, ask your banking representative how often interest is paid. Once you know when interest is paid you can check your account statements to verify the interest amount you earned.
Are savings accounts worth it?
Yes, it is always worth it to have a savings account. Whether you’re saving to buy a home, car, take a vacation, or pay for college tuition, savings accounts can help you focus your saving efforts and earn interest in the process. At the CU SoCal, we can help you
open a savings account today!
Savings accounts FAQs
What are the different types of savings accounts?
Money market accounts and
certificates of deposit (also known as certificates) are two types of savings
accounts that can pay a higher interest rate than a traditional savings account.
How do savings accounts compare to money market accounts?
Traditional savings accounts pay interest on the monthly balance with tiered levels of interest, so the more you save the more earned interest you’ll receive. There are no restrictions on the number of deposits or withdrawals an account holder can make; however, there may be a minimum balance required to receive each of the tiered interest rates. A
money market account is a type of savings account that pays interest on the account balance. Most money market accounts have a limit on the number of withdrawals per month you can make. There are additional
differences between savings accounts and money markets to be aware of.
Are Roth IRAs better than savings account?
A
Roth IRA is a type of retirement account that allows your monetary contributions and interest earnings to grow tax free. Roth IRAs are for building your retirement funds, while a traditional savings account is more for everyday savings for vacations, emergencies, a new car, and current expenses. When considering a
Roth IRA vs. a traditional savings account, they are both part of a healthy financial savings plan.
How much should I keep in my savings account?
There is no one-size-fits-all approach to savings.
How much money you keep in your savings account (or several accounts) depends on your monthly income and expenses, age, retirement savings goals, and your personal financial goals.
How can I automate my savings?
Automating your savings can be a great strategy for reaching both short- and long-term savings goals. All credit unions and banks provide account features and services you can use to have your income directly deposited into your savings account. A credit union representative can assist you with setting up
direct deposit of income, such as paychecks or Social Security payments.
Why Savvy Consumers Choose CU SoCal
For over 60 years, CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Get Started on Your Checking Account Today!