Which Savings Accounts Are Taxable And Which Are Tax-Free?

Shawn Plummer

CEO, The Annuity Expert

Saving money is essential to achieving financial stability, and understanding the tax implications of various savings accounts can help you make the best decisions for your financial future. In this guide, we’ll explore the differences between taxable and tax-free savings accounts, giving you the knowledge to make informed decisions about where to spend your hard-earned money.

Taxable Savings Accounts

Taxable savings accounts are financial products where the interest earned is subject to federal income tax and, in some cases, state and local taxes. These accounts typically offer higher interest rates than tax-free accounts but come with the added cost of taxes on your earnings. Let’s look closely at some common types of taxable savings accounts.

Traditional Savings Accounts

Traditional savings accounts are popular for individuals looking to save money without taking on significant risks. However, the interest earned on these accounts is generally subject to federal income tax and, in some cases, state and local taxes.

Money Market Accounts

Money market accounts are savings accounts that typically offer higher interest rates than traditional ones. However, like traditional savings accounts, the interest earned on money market accounts is generally subject to federal income tax and potentially state and local taxes.

Certificates of Deposit (CDs)

CDs are a reliable form of investment where you deposit money for an agreed-upon period, often from months to years. While the fixed interest rate rewarded is taxable on a federal level, it may also be subject to state and local taxes depending upon your residence.

Dividend-paying Stocks and Bonds

Dividend-paying stocks and interest-bearing bonds are considered taxable investments because their income is subject to taxes. However, qualified dividends and long-term capital gains from these investments are generally taxed lower than ordinary income, while interest income from bonds is taxed as ordinary income.

Which Savings Accounts Are Taxable And Which Are Tax-Free?

Tax-Free Savings Accounts

Tax-free savings accounts are financial products where the interest earned is not subject to federal income tax. These accounts encourage long-term saving and investing for specific purposes, such as retirement or education. Let’s explore some common types of tax-free savings accounts.

Roth Individual Retirement Accounts (IRAs)

Roth IRAs are retirement savings accounts that allow individuals to contribute after-tax dollars, meaning the money you contribute has already been taxed. The primary benefit of a Roth IRA is that qualified withdrawals during retirement are tax-free, allowing your money to grow tax-free over time. Additionally, Roth IRAs have no required minimum distributions, providing more flexibility in retirement.

Health Savings Accounts (HSAs)

HSAs are tax-advantaged accounts designed to help individuals with high-deductible health plans save money for medical expenses. Contributions to HSAs are tax-deductible, and the interest and investment earnings within the account grow tax-free. In addition, withdrawals for qualified medical expenses are tax-free, making HSAs a valuable tool for managing healthcare costs.

529 College Savings Plans

529 plans are tax-advantaged investment accounts to help families save for future education expenses. Contributions to 529 plans are made with after-tax dollars, but the earnings in the account grow tax-free. Withdrawals for qualified education expenses, such as tuition, fees, and room and board costs, are tax-free.

Municipal Bonds

Municipal bonds are debt securities state and local governments issued to fund public projects, such as infrastructure improvements and public schools. The interest earned on municipal bonds is generally exempt from federal income tax and, in some cases, may be exempt from state and local taxes.

Earn The Highest Interest Rates On Savings Today

Fixed annuities are almost identical to Certificates of Deposit (CDs) accounts and provide higher interest rates and penalty-free withdrawals for income.

TermInsurance CompanyAPY
N/AMoney Market Account – Optimum Bank5.26%
N/AMoney Market Account – FVC Bank5.26%
N/ASavings Account – CloudBank 24/7 5.26%
12 MonthsBread Savings CD5.50%
48 MonthsClear Spring Fixed Annuity5.15%
5 YearsAthene Fixed Annuity5.30%
10 YearsEquitrust Fixed Annuity6.00%
*Fixed annuities are only for saving money to use in retirement.

Disclaimer: This is a review. The Annuity Expert is not associated with a bank or credit union. However, fixed annuities are sold at most financial institutions. We aim to help you find the highest interest rates for your retirement savings. We may receive a small referral fee if you purchase something using a link in this guide.

Find And Compare The Highest Interest Rates

Find the highest interest rates for your savings, ranging from 3 months to 10 years, all in one place.

How to Choose the Right Savings Account for You

With various taxable and tax-free savings accounts available, it’s essential to consider your unique financial situation and goals when choosing the correct account.

Consider Your Financial Goals

Think about your short-term and long-term financial goals, such as building an emergency fund, saving for a down payment on a home, or funding your retirement. Different savings accounts serve different purposes, so choosing one that aligns with your goals is crucial.

Evaluate Your Risk Tolerance

Your risk tolerance plays a significant role in determining the type of savings account that’s right for you. For example, if you’re risk-averse, you may prefer traditional savings accounts or CDs. On the other hand, if you’re willing to take on more risk for potentially higher returns, dividend-paying stocks or municipal bonds might be a better fit.

Understand the Tax Implications

Take the time to understand how taxes will impact your savings account earnings. While taxable accounts may offer higher interest rates, it’s essential to consider the impact of taxes on your overall returns. Sometimes, tax-free accounts might be more advantageous, depending on your financial situation and goals.

Next Steps

Understanding the differences between taxable and tax-free savings accounts is crucial in making informed decisions about where to save and invest your money. You can choose the proper savings account to help you reach your financial objectives by considering your financial goals, risk tolerance, and tax implications. By staying informed and making intelligent financial decisions, you’ll be well on your way to achieving financial security and prosperity.

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frequently Asked Questions

How much money can you have in your savings account without being taxed?

The federal government taxes savings account interest as income, and any earnings above $10 must be declared to the IRS on a 1099-INT form. Your bank or other financial institution must supply you with this information.

What is the $3000 rule?

Financial institutions must ensure the legitimacy of any customer purchasing money orders, bank checks, cashier’s checks, and traveler’s checks worth more than $3,000 by verifying and recording their identity.

Does the IRS know if you have a savings account?

Absolutely. It’s likely that the IRS is already aware of several of your financial accounts and can quickly access information about their corresponding balances.

Can the IRS take your savings account?

Don’t let unpaid taxes get the best of you; An IRS levy grants the government permission to take away your assets to settle an outstanding tax debt. Wages, bank account funds, and even vehicles may be seized without notice if a levy is placed on them – leaving only real estate or other possessions within reach from being taken by force.

What bank account can the IRS not touch?

No matter your bank account type, the IRS can access it.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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