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.
