At the end of 2021, thebest high-yield savings accountsearned an average of about 0.5% to 1%.
As long as the Fedkeeps raising rates, high-yield savings account rates will keep inching higher.
But all that interest isnt free money.
You have to pay taxes on savings account earnings.
Heres how it works.
Are Savings Accounts Taxable?
Interest earned on a savings account is considered taxable income by the Internal Revenue Service.
That means it’s crucial that you report it on your tax return.
Probably not as good as youd like.
It always seems like an uphill battle to build (and keep) a decent amount in savings.
But what if your car breaks down, or you have a sudden medical bill?
Ask one of these companies to help… ## How Is Interest Income From Savings Accounts Taxed?
Savings account interest is taxed at your marginal tax rate, also known as your earned income tax rate.
This can range from 10% to 37%, depending on yourtax bracket.
Here are the 2022 marginal tax rates (used when filing your taxes in 2023) for reference.
Interest earned in 2022 must be reported when you file your taxes in 2023.
Youll report that amount as taxable income when you file.
The IRS wont know about the interest income if your bank doesnt issue a 1099-INT.
Still, youre supposed to reportallinterest earned in the year even if its just a few dollars.
Dont assume your 1099-INT wasnt issued, either.
How to Avoid Tax on Savings Accounts
Theres really no such thing as a tax-free savings account.
But if youre looking to save money on taxes or defer them until later youve got options.
Contributions also help lower your taxable income in the year theyre made.
Roth contributions dont lower your taxable income for the year.
IRAs and 401(k)s are investment accounts, not savings accounts.
Your money will grow when stocks and mutual funds inside the account gain value.
They dont earn interest like a savings account.
Youll face an IRS tax penalty for withdrawing funds from traditional retirement accounts before age 59.5.
Savings Bonds
Series EE andSeries I bondsfrom the U.S. Treasury Department accumulate interest like a savings account.
The choice is yours.
Government savings bonds arent subject to state or local tax.
Health Savings Accounts
Ahealth savings accountisnt like a traditional savings account.
(This penalty goes away when you turn 65).
HSAs accumulate interest but the rates are usually very low.
If you manage to accumulate any notable interest, you dont need topay taxeson it.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.
She focuses on taxes, retirement, investing and life insurance.
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