Do I pay taxes on CDs?
Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.
They are fixed-income investments issued by banks and pay interest at a stated rate for a specific time period. CD interest is taxed at the rates applicable to ordinary income, up to 37% at the top federal tax bracket rate for 2023.
If the CD is placed in a tax-deferred 401(k) or individual retirement account (IRA), any interest earned on the CD may be exempt from paying taxes in the year it was earned. 2 Instead, you will pay taxes on that money when it is withdrawn from the 401(k) or IRA after you retire.
| Top Nationwide Rate (APY) | Balance at Maturity | |
|---|---|---|
| 1 year | 6.18% | $ 10,618 |
| 18 months | 5.80% | $ 10,887 |
| 2 year | 5.60% | $ 11,151 |
| 3 year | 5.50% | $ 11,742 |
- Investing in a tax-deferred account such as a traditional individual retirement account or a 401(k).
- Stashing money in a tax-exempt account such as a Roth 401(k) or a Roth IRA.
That's up to each issuer. In practice, however, most CDs compound either daily or monthly. The more frequent the compounding, the more interest your interest will earn. The frequency with which your CD compounds is reflected in the annual percentage yield (APY) that the CD's issuer promises you when you buy a CD.
Tax advantages: You don't pay taxes on any interest earned in an IRA CD during the tax year unless you take money out. With a Roth IRA CD, you won't pay federal taxes at withdrawal as long as you meet Roth IRA withdrawal rules.
Projections suggest that we may see no rate increases in 2024, and that the Fed might start dropping its rate later this year, according to the CME FedWatch Tool on March 19. If the Fed rate drops, CD rates will likely follow suit, though it's up to each bank and credit union if and when that occurs.
A penalty assessed on the early withdrawal of funds from a time savings account or certificate of deposit is deductible in determining adjusted gross income (AGI), even if it exceeds the interest income earned on the account during the year (IRC § 62(a)(9)).
If you opened a CD and specified that the interest accumulate in the CD, you may be allowed to withdraw the accrued interest in the future without an early withdrawal penalty. This can be useful if you need some money, but you don't need any of the CD principal. It can also be useful if interest rates go up.
Why you should put $15,000 into a 1-year CD now?
With such high interest rates, the earnings on CDs are impressive. You'll earn $850.50 for a total of $15,850.50 after one year when you open a $15,000 1-year CD with Popular Direct when calculating the returns at current rates.
The bottom line
If you put $10,000 in a 5-year CD right now, you'd earn more than $2,600 in interest by the end of the term. That's a significant bit of interest, and what's better is that it comes with virtually no risk.
You can get 6% on a CD by becoming a member of a credit union offering a certificate with this rate.
There is no specific limit or threshold that would cause the IRS to tax it. That being said, ant cash deposits of $10,000 or more would be reported by the bank in a Currency Transaction Report (CTR) to FinCEN, an arm of the Treasury Department.
The most common sources of tax-exempt interest come from municipal bonds or income-producing assets inside of Roth retirement accounts.
Generally, both the interest and dividends earned on savings accounts is considered taxable income, according to the IRS, which means that you're on the hook for taxes on the earnings each year.
How much interest would you make on a $5,000 CD? We estimate that a $5,000 CD deposit can make roughly $25 to $275 in interest after one year. In comparison, a $10,000 CD deposit makes around $50 to $550 in interest after a year, depending on the bank.
There are a few different ways to invest your money to earn interest and live off of that income. The most popular investments are bonds, certificates of deposit (CDs) and annuities. The interest that you'll earn will depend on the amount of money you have in your account when you go to live off of that interest.
| Bank | Term length | APY* |
|---|---|---|
| First Internet Bank | 12 months | 5.31% |
| EverBank | 9 months | 5.15% |
| Synchrony | 9 months | 4.90% |
| Marcus by Goldman Sachs | 12 months | 4.90% |
A CD is a time-bound deposit account enabling you to save at a fixed interest rate with the added protection of Federal Deposit Insurance Corporation (FDIC) insurance. IRAs are tax-advantaged accounts used to save and invest for retirement. You can, however, put some of your IRA savings into an IRA CD.
How much interest income is taxable?
Interest income and ordinary dividends (qualified dividends are taxed at capital gains rates) are taxed at the same rate as your ordinary income tax. For example, if your federal income tax rate is 22%, your interest income or dividends will also be taxed at 22%.
One of the most important factors to consider is time. When you invest in an IRA, you're making a retirement investment and will likely be penalized if you access your money before you're 59 ½ years old. So, if you need your money before you retire, a standalone CD is likely your better option.
Why it's probably time to buy a CD. Rates will remain high for a bit longer, but it's unclear how long. The Fed has indicated that there will three rate cuts in 2024, which means it's unlikely that CD rates will continue to climb . Waiting to open a CD could mean missing out on some stellar rates.
- Credit One Bank – 5.25% APY for a one-year CD, $100,000 minimum deposit for APY.
- Suncoast Credit Union – 5.25% APY for a one-year CD, $100,000 minimum deposit for APY.
- Navy Federal Credit Union – 5.10% APY for a one-year CD, $100,000 minimum deposit for APY.
A jumbo CD is a certificate of deposit that traditionally requires a minimum deposit of $100,000. Some banks and credit unions offer jumbo CDs with lower minimums, such as $25,000. If that sum is far higher than the right amount for you to put into CDs, you can skip these CDs.
