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Are CDs Taxable?

  • CD interest is taxed as ordinary income and you must report it on your tax return if the term is longer than one year, even if you can’t cash the CD until it matures.
  • Financial institutions must report CD interest earned during the tax year on Form 1099-INT and you must pay taxes on any interest of $10 or more.
  • You can avoid paying taxes on CD interest by placing your CD in a Roth IRA, HSA or 529 account.
  • You can defer taxes on CD interest by placing your CD in a traditional IRA or 401(k) account or by purchasing short-term CDs.

Our top picks for the best CDs

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Featured Offer

Barclays 6-month CD
LEARN MORE FDIC insured
Rates as of 10/15/2024
APY
apy%
Term Length
6 months
Minimum Opening Deposit
$min_deposit
Why We Like It

Editor's take

The Barclays six-month CD is a solid option for short-term savers looking for flexibility and growth. It offers a competitive interest rate without tying up your money for too long, and its daily compounding interest means your balance grows faster than with monthly or annual compounding. Additionally, there are no maintenance fees or minimum balance requirements, making it accessible to a wide range of savers.

As an online-only bank, Barclays doesn’t have physical branches. But if you’re comfortable managing your accounts online, this CD offers a good mix of convenience, growth, and easy access to your money.

PROS

  • Competitive APY
  • No minimum deposit required
  • Initial deposit isn’t due until 14 days after account opening
  • Insured by the FDIC

CONS

  • Must maintain a balance that would earn at least 1 cent if you want the interest to post to your account
  • Early-withdrawal penalty
  • No physical branch locations

Valley Direct 6-month CD
LEARN MORE FDIC Insured
rates_last_updated
APY
apy%
Term Length
6 months
Minimum Opening Deposit
$min_deposit
Why We Like It

Editor's take

The Valley Direct six-month CD is an excellent option if you’re looking to boost your returns in a short time. With a competitive interest rate, it offers an appealing incentive for those willing to lock in their funds for six months. The minimum deposit is $500, which makes it accessible to a wide range of investors.

Keep in mind that you must open the CD with “new money,” meaning your funds should come from an external source. Once you open the CD, no additional deposits can be made until maturity, which could limit your flexibility.

The account comes with a maximum deposit limit of $500,000, making it suitable for significant investments. If you need to access your money early, be aware that there’s a penalty equal to 90 days’ interest on the amount withdrawn.

The lack of customer support on weekends might be inconvenient for some users. Additionally, interest is compounded quarterly, which is less frequent than some other CDs that offer monthly or even weekly compounding.

In summary, the Valley Direct six-month CD is a practical option if you’re ready to commit your funds for the full term. It’s well-suited for those focusing on short-term, high-yield investing without the need for immediate access to cash.

PROS

  • Competitive APY
  • Accessible minimum deposit
  • No maintenance fees

CONS

  • Must deposit new money
  • Limited customer support
  • Quarterly compounding

Quontic 6-month CD
LEARN MORE FDIC Insured
Rates rates_last_updated
APY
disclosure
apy
Term Length
6 months
Minimum Opening Deposit
min_deposit
Why We Like It

Editor's take

The Quontic six-month CD works well for savers who want competitive rates and are comfortable with online banking. With a $500 minimum opening deposit, it’s accessible to many and offers an easy entry into short-term savings.

You’ll get a competitive APY, and the interest earned is compounded daily. Plus, there’s a 10-day grace period after maturity for penalty-free withdrawals, which gives you some flexibility when the CD ends.

One thing to keep in mind is that if you withdraw your money before the six months are up, you’ll lose all the interest earned—a larger penalty than most other banks charge. Quontic is also a digital-only bank, so there are no physical branches or cash deposit options. However, their mobile app, available on iOS and Android, is user-friendly and packed with helpful tools for managing your account.

Overall, the Quontic six-month CD is a practical fit if you want strong rates and don’t mind handling everything online.

PROS

  • No monthly service fee
  • Takes less than 3 minutes to open an account
  • Innovative online tools
  • Insured by the FDIC
  • Accessible minimum deposit

CONS

  • High early withdrawal penalty
  • No physical branch locations
  • Doesn’t accept cash deposits

Sallie Mae 14-month CD
LEARN MORE FDIC insured
rates_last_updated
APY
4.00%
Term Length
14 months
Minimum Opening Deposit
min_deposit
Why We Like It

Editor's take

The Sallie Mae 14-month CD is a solid choice for you if you want good returns on a relatively short investment. Interest is compounded daily, which helps your savings grow more over time.

With a minimum opening deposit of just $1, this CD is accessible for almost anyone. However, if you need to withdraw your money before the term ends, keep in mind that there’s a penalty equal to 180 days of interest, which could reduce your overall earnings.

The CD also automatically renews, so you don’t have to do anything to keep your investment going. Just remember that the interest rate and terms may change upon renewal, so it’s wise to review those details as your maturity date approaches.

In summary, the Sallie Mae 14-month CD is a great option for you if you can commit to the full term and don’t need to access your money early.

PROS

  • Competitive rates
  • Automatic renewal option
  • No monthly fees
  • Insured by the FDIC

CONS

  • No physical brances
  • Fee for returned deposits

Are CDs taxable?

The interest earned on CDs is treated as ordinary income by the Internal Revenue Service (IRS) meaning it is taxable. You must declare the interest earned when you file your taxes, how much you pay will depend on your income.

There are, however, some exceptions for tax-advantaged retirement CDs, such as traditional IRAs or 401(k) accounts. The interest earned on these accounts is not counted as ordinary income, so you can grow your savings tax-free. You won’t have to pay taxes on the interest earned until you start making withdrawals after you retire.

Depending on where you live, you might also have to pay taxes on your CD interest to your state and local taxing authorities. Many states impose a separate income tax, and some local governments also tax residents on their ordinary income.

How are CDs taxed?

When you invest in a CD, you’ll be taxed on the interest you earn each year. This includes CDs you hold for multiple years.

The financial institution that holds your CD must send you a 1099-INT form each year to report the interest you’ve earned. A copy is also transmitted to the IRS, and you must include the interest as ordinary income on your tax return even if you don’t withdraw and roll it into another CD.

For example, if you open a CD with a term of four years, you’ll pay taxes on the interest earned each year. If you earn $125 in interest in year one, you’ll receive a 1099-INT, and you must report that amount as ordinary income on your tax return. If you receive $150 in interest in year two, you must report it as ordinary income in that year.

CD interest is taxed at the same rate as the rest of your ordinary income based on your tax bracket.

Let’s take a look at the federal marginal tax rates for the 2024 tax year (with taxes due April 2025):

Tax rate Single filers Married individuals filing jointly Married filing separately Heads of households
10% $0 to $11,600 $0 to $23,200 $0 to $11,600 $0 to $16,550
12% $11,601 to $47,150 $23,201 to $94,300 $11,601 to $47,150 $16,551 to $63,100
22% $47,151 to $100,525 $94,301 to $201,050 $47,151 to $100,525 $63,101 to $100,500
24% $100,526 to $191,950 $201,051 to $383,900 $100,526 to $191,950 $100,501 to $191,950
32% $191,951 to $243,725 $383,901 to $487,450 $191,951 to $243,725 $191,951 to $243,700
35% $243,726 to $609,350 $487,451 to $731,200 $243,726 to $365,600 $243,701 to $609,350
37% $609,351 or more $731,201 or more $365,601 or more $609,350 or more

It’s important to remember that your income is taxed progressively, so portions of your income falling into lower tax brackets will be taxed at their respective lower rates.

When do I pay taxes on a CD?

Interest earned on CDs is taxed during the year it accrues. It doesn’t matter whether or not your CD has matured. CD interest is taxable income even if you haven’t been able to access it. As previously mentioned, interest earned on CDs with multi-year durations will be taxed each year.

For example, if you open a two-year CD with a deposit of $5,000 with an APY of 5%, you’ll earn $250 in interest during the first year. You’ll report $250 in ordinary interest income on the income tax return you file for that year. In the second year, you’ll earn $262.50 in interest and have to report it as ordinary income and pay taxes on it.

How do I report CD interest on a tax return?

The financial institution where you opened your CD account must issue a Form 1099-INT by January 31 each year. This form reports the interest you earned during the previous tax year. For example, if you receive a 1099-INT from your bank on January 31, 2025, it will show the interest you earned on your CD during the 2024 tax year.

You must report the interest on your income tax return. On Form 1040, you report it on line 2b. You’ll also include any interest you earned during the tax year from other bank accounts or CDs.

If you open a CD that matures during the same year, the 1099-INT will reflect all of the interest earned. If you instead open a CD with a term of two years or more, your 1099-INT will report the incremental interest you earned for a particular year. The 1099-INTs you receive for subsequent years of the CD’s term will report the interest earned only during those years.

How am I taxed if I cash out an IRA CD after age 65?

How you will be taxed when you cash out a CD held in an individual retirement account depends on the type of IRA you have.

Traditional IRA

If you have a traditional IRA with a retirement CD, the taxes are deferred until you start making withdrawals. However, since you make deposits to a traditional IRA with pre-tax income, withdrawals you make after age 65 are taxable, and you must report and pay taxes on them.

Roth IRA

With Roth IRAs, you make contributions with post-tax income. Since your income was already taxed when you made your contributions, you won’t pay taxes on your withdrawals during your retirement. This also means you won’t have to pay taxes on CD interest for a CD held in your Roth IRA account.

How does early withdrawal from a CD affect how much I pay in taxes?

Early withdrawal penalties are fully deductible on your tax return. If you withdraw funds before your CD’s maturity date and are assessed such a penalty, you can offset your taxes on your interest income with the penalty.

For example, if your 1099-INT reports you earned $250 in CD interest during the year, you’ll report $250 on line 2b and pay ordinary income taxes on it. If you withdrew funds from your CD and paid an early withdrawal penalty, the 1099-INT will report the penalty in box 2 of the form.

How to avoid tax on CDs

While CD interest is treated as taxable income by the IRS, there are ways you can avoid paying taxes or defer them until later. Let’s take a look at some of the best CDs to save money tax-free.

IRA CD

An IRA CD is placed in a traditional IRA. Contributions made to a traditional IRA are made with pre-tax dollars. Since the account is tax-deferred, it allows your contributions to grow tax-free until you begin taking withdrawals in retirement. At that time, you’ll pay taxes on your withdrawals, including the interest you earned on your CDs.

Since traditional IRAs are tax-deferred accounts, they allow your money to grow without taxes for years. In many cases, people are in lower tax brackets after they retire than during their working years, so you might end up paying less taxes overall by deferring taxes until retirement through traditional IRA and IRA CD contributions.

Roth IRA CD

Roth IRAs are also tax-advantaged accounts. Unlike a traditional IRA, Roth IRA contributions are made with post-tax dollars, including contributions to a Roth IRA CD.

You won’t have to pay taxes on the interest a Roth IRA CD earns or on withdrawals you make from the account in the future as you already paid taxes on the money you used to open the account. However, you must ensure your annual contributions don’t exceed the annual contribution limit.

529 CD

A 529 plan is a type of child savings account and a great way to save money for your child’s college education. You contribute to a 529 plan with after-tax dollars, and your money can grow tax-free in the account.

If you open a 529 CD, any interest earned is not subject to federal taxes, but there is one caveat. You must use the funds you withdraw to pay for qualified education expenses. Money spent on non-qualified education expenses can be taxed, and you could face penalties.

Some states also allow you to deduct contributions made to state-sponsored 529 plans, which can provide added tax benefits to you.

HSA CD

A health savings account (HSA) CD is a way to earn a higher interest rate on the money in your HSA than what the account typically pays. Contributions you make through your employer are from pre-tax dollars deducted from your gross income.

If you contribute to your HSA outside of your employer, you can deduct those on your tax return. You don’t have to pay taxes on interest earned from an HSA CD when you use the money to pay for qualified medical expenses.

Short-term CDs

Another option to defer taxes is through short-term CDs. For example, placing money in a short-term CD that matures in 12 months or less allows you to pay taxes only when it matures.

By contributing to a short-term CD, such as a one-year CD, you can defer taxes to the following year if you expect to earn less. This might mean paying lower taxes on the interest earned.

How taxes on CDs compare to other investments

CDs provide a fixed return on investment over a set duration. The financial institution pays a higher interest rate over the term in exchange for the use of your money. Here’s how taxes on CDs compare to other types of savings accounts and investment options.

Savings accounts

Just like CDs, the interest you earn on traditional savings accounts is counted as ordinary income and therefore, you will need to pay taxes on savings account interest. This also applies to high-yield savings accounts and money market accounts.

However, high-yield savings accounts and money market accounts offer other benefits versus CDs that might make them preferable. When you deposit money in a high-yield savings account or an MMA, you benefit from liquidity and can access the funds when needed without worrying about an early withdrawal penalty.

Investments

Stocks, bonds and mutual funds are taxed differently than CD interest. You’ll pay capital gains taxes on your investment earnings at a lower tax rate than your ordinary income. However, stocks, bonds and mutual fund investments are more risky than CD contributions. Since these investments are not FDIC-insured, you face a risk of loss.

Our top picks for CDs

FAQs: Are CDs taxable?

Do you pay taxes on CD interest?

Interest earned on CDs is treated as ordinary income by the IRS and subject to taxes at your regular tax rate. However, you can defer or avoid taxes by placing a CD in a tax-advantaged retirement account.

Are CDs taxable when cashed?

When you cash in a CD, you’ll pay taxes on the interest you earned. You won’t pay taxes on the principal because it is a return of your money.

How much tax do you pay on CD interest?

The tax you’ll pay on CD interest depends on your tax bracket. Your tax rate will be the same for your CD interest as for other ordinary income you earn.

How do you avoid tax on CD interest?

You can avoid tax on CD interest by placing the CD in a Roth IRA, HSA or 529 account. You can defer taxes on CD interest by placing the CD in a traditional IRA or 401(k) account.

How are joint CD accounts taxed?

If you hold a joint CD account with someone else, you’ll each be responsible for paying taxes on your shares. If you are married and file a joint tax return, your interest income will be combined and treated the same as other ordinary income on your joint return.

Are state taxes applicable on CD interest?

Some states require you to file state income tax returns. If you live in a state that assesses separate income taxes, you’ll also have to report your CD interest in your state return as ordinary income and pay taxes on it.

About the Author

Christy Montour
Christy Montour Personal Finance and Investment

Christy Montour is a seasoned finance writer with extensive experience in explaining a wide range of investment types, retirement accounts, and insurance products. With a background in taxation from law school, Christy possesses a deep knowledge of tax strategies and the tax code. 

Christy has written thousands of blogs for clients on finance and investment topics. She covers a wide range of subjects, from the Offshore Voluntary Disclosure Program to IRS installment plans, offers-in-compromise, tax liens, levies, and criminal tax issues such as tax evasion and fraud. Christy’s expertise allows her to break down complex financial topics into clear, accessible content for her readers.

About the Reviewer

Blake Esken
Blake Esken Los Angeles Times

Blake Esken has over 15 years of experience in product management and has been a member of the Los Angeles Times staff for over five years.

As part of his role at the Los Angeles Times Commerce Team, Blake acts as the in-house reviewer and fact checker for LA Times Compare. He supervises all content for compliance and accuracy and puts to use skills he has honed through years of experience managing high-stakes projects for a range of industry-leading companies.

He has a strong background in data analysis, compliance, and communication, which allows him to support LA Times Compare through fact-checking in an effort to provide up-to-date and factual information across our content.

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