Do You Get Taxed on Savings Accounts?

Income generated from savings can be subject to taxation. Understanding how various types of savings income are taxed is important for navigating financial obligations and making informed decisions about where to keep and grow funds.

Taxable Savings Income

Interest income from traditional savings accounts, checking accounts, money market accounts, and Certificates of Deposit (CDs) is taxable. This interest is taxed as ordinary income, added to other income sources at an individual’s regular income tax rate. All interest earned must be reported, though financial institutions typically report it to the IRS only if it totals $10 or more.

Dividend income from investments such as stocks, mutual funds, and exchange-traded funds (ETFs) is taxable. Dividends are categorized as either qualified or non-qualified. Non-qualified dividends are taxed at an individual’s ordinary income tax rate. Qualified dividends receive more favorable tax treatment, taxed at lower long-term capital gains rates. To be considered qualified, dividends must meet specific IRS conditions, including being paid by a U.S. or qualified foreign corporation, and the stock held for a minimum period.

Profits from selling investments like stocks, bonds, or real estate for more than their original purchase price are capital gains, which are taxable. The tax rate applied depends on how long the asset was held. Short-term capital gains, from assets held one year or less, are taxed at ordinary income rates. Long-term capital gains, from assets held more than one year, qualify for lower tax rates. This distinction can significantly impact the tax liability on investment profits.

Tax-Advantaged Savings Accounts

Several types of savings vehicles offer specific tax benefits, allowing earnings to grow with reduced or deferred tax implications. These accounts are designed to encourage saving for particular purposes, such as retirement, healthcare, or education.

Individual Retirement Accounts (IRAs) are tax-advantaged savings accounts. Traditional IRAs allow tax-deductible contributions, potentially reducing current taxable income. Earnings grow tax-deferred, with taxes paid on withdrawals in retirement as ordinary income. Roth IRAs are funded with after-tax contributions, offering no immediate tax deduction. Earnings grow tax-free, and qualified withdrawals in retirement are also tax-free, provided certain conditions are met, such as age and holding period requirements.

Employer-sponsored retirement plans, such as 401(k) plans, offer similar tax advantages. Contributions to traditional 401(k)s are often pre-tax, lowering an employee’s current taxable income. Investments grow tax-deferred, with withdrawals taxed in retirement. Many employers also offer Roth 401(k) options, where after-tax contributions lead to tax-free qualified withdrawals in retirement.

Health Savings Accounts (HSAs) provide a triple tax advantage for individuals enrolled in a high-deductible health plan. Contributions are tax-deductible or made pre-tax, reducing taxable income. Funds grow tax-free, and withdrawals are tax-free when used for qualified medical expenses. Unspent HSA funds can roll over year to year and be used for medical expenses later in life. After age 65, non-medical withdrawals are taxed as ordinary income.

For education savings, 529 plans offer significant tax benefits. Contributions grow free from federal taxes, and withdrawals are tax-free if used for qualified higher education expenses. While there is no federal income tax deduction for contributions, many states offer a state income tax deduction or credit for contributions to their state’s plan.

Receiving Tax Forms for Savings

Financial institutions report certain types of income earned on savings to both the taxpayer and the IRS. These reports are provided through various tax forms that summarize the income for the tax year, which are important for accurately preparing an income tax return.

Form 1099-INT reports interest income from accounts such as traditional savings accounts, checking accounts, money market accounts, and Certificates of Deposit. Financial institutions issue this form if the interest paid to an individual is $10 or more in a calendar year. The form details the amount of interest income.

For dividend and distribution income, individuals receive Form 1099-DIV. This form is issued by financial institutions that pay $10 or more in dividends during the year. Form 1099-DIV distinguishes between total ordinary dividends and qualified dividends, which are taxed differently.

When investments like stocks, bonds, or other securities are sold through a broker, the proceeds are reported on Form 1099-B. This form is issued by brokers to both the taxpayer and the IRS. It provides details necessary for calculating capital gains or losses, including the date of sale, the type of security, and the amount of proceeds received. Taxpayers use this information to report their capital gains and losses on their tax returns.