A savings account is a secure place to keep your cash while earning interest, but any amount of interest you earn from a savings account will usually be taxable.
You are required to report any interest earnings from most savings accounts to the IRS. If the yearly earned interest is $10 or more, your bank or financial institution will send a Form 1099-INT to the IRS and a copy to you to include when completing your tax return.
Here’s a closer look at how taxes affect different types of savings accounts.
Key Points
• Interest earned on money in a typical savings account is taxable and must be reported to the IRS.
• The promotional bonuses from savings accounts are also considered taxable income.
• You will receive a 1099-INT form from your financial institution when the interest earned on your savings account is $10 or more — however, you should report any amount you earn to the IRS.
• Some types of savings accounts, including IRAs, 529 plans, and HSAs, offer various tax benefits, such as tax-deferred growth or tax-free withdrawals.
• While both 529 plans and Coverdell Education Savings Accounts both offer tax advantages when saving for college and education expenses, they differ in their requirements, contribution limits, fees, and flexibility.
A Quick Refresher on Savings Accounts
A typical savings account is a place where you can deposit money not meant for everyday expenses — rather, the funds might be set aside for emergencies or a dream vacation. Savings accounts differ from checking accounts in that they tend to offer a higher APY (annual percentage yield), so you can earn a modest interest while saving for the future.
Many savings accounts can be independent or attached to a checking account. Other types, like CDs (certificates of deposit) operate as a financial product where you may earn a higher interest rate over a fixed amount of time. Almost all savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC).
Most savings accounts can be opened online, over the phone, or in person at a bank or credit union. Steps to opening a savings account can include:
• Providing proof of identification. You’ll need your Social Security number and a valid government-issued ID, such as a passport or driver’s license.
• Offering personal details such as your legal name, address, phone number, email address, and date of birth.
• Selecting the type of account. You can usually choose between a single or joint savings account. Some banks may offer a selection of savings accounts with varying rates and terms.
• Making your initial deposit. Once your application is completed and approved, financial institutions will generally require an initial deposit — between $25 and $100 for banks and $1 and $10 for credit unions. Sometimes you may open an account without any opening deposit at all.
There are other types of savings accounts and vehicles, such as IRA plans for retirement and 529 plans for college, that may require additional steps and information.
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What’s Taxable in Savings Accounts?
Earned interest on your savings account is almost always taxed. It will be reported on a 1099-INT form if it equals $10 or more per year, but you should report it even if it’s under $10. Here’s a closer look at what can be taxed.
Earned Interest Taxes
Any amount of earned interest you make on a savings account is taxable, be it $600 dollars a year or a mere $.50. The interest will be taxed according to your income tax bracket for the year.
Promotional Bonuses
Some savings accounts may offer a promotional bonus for opening the account. Unfortunately, that “free money” counts as taxable income. You must report it to the IRS, and your bank will report it on your 1099-INT form.
If the notion of paying taxes on your savings has you clutching to your piggy bank, know this: A savings account is still a good idea, in most cases, since it provides a secure place to save money for your goals and earn interest while having easy access to your funds.
Which Savings Accounts Are Tax-Advantaged?
Knowing how different types of savings accounts are taxed may help you reach your financial goals. As mentioned above, the interest in a typical savings account is taxable.
For example, if you have $10,000 in a high-yield savings account with a $4.00% APY, you will be paying taxes on $400 (or more, depending on compounding interest) of earned interest for the year.
Some types of savings accounts or plans, however, are tax-advantaged in certain ways. If a savings plan is tax-exempt, for example, you may contribute after-tax money, but then later have the benefit of making tax-free withdrawals, when you may be in a lower income bracket. Conversely, some accounts are tax-deferred, which means taxes aren’t paid until withdrawals are made down the road.
There are different ways a savings account may be tax-advantaged. Here are common types of savings accounts that offer tax benefits.
Types of Savings Accounts That Are Tax-Advantaged
You might think of a few savings accounts as “special cases” in terms of taxes. These may include certain accounts that can be used to save for retirement, a child’s college costs, and healthcare costs. Some of these plans may offer a higher rate of return but also higher risks, and may have rules about when and how you can access your funds in order to avoid paying a penalty.
IRA Accounts
An IRA is an individual retirement account that comes with tax advantages. Contributions to your IRA may be invested in stocks, bonds, CDs, and other investments.
An IRA is different from a savings account in that it’s meant to serve as a long-term investment. The funds you contribute to your plan may be subject to the highs and lows of the stock market over time, but historically, the average rate of return is 7% to 10% — which can be significantly higher than a savings account. Barring certain exceptions, penalties will be applied if you withdraw funds before the age of 59 ½.
There are two types of IRAs:
• Traditional IRA. Contributions to a traditional IRA are typically made with pre-tax dollars up to an annual limit. This money will then grow tax-deferred within the account. These contributions can typically lower your taxable income in the year you make them. You will need to pay taxes on both the principal and earnings later, however, when you withdraw the money in retirement.
• Roth IRA. Contributions to a Roth IRA are taxed up front, but you won’t owe taxes on the earnings or the principal when you later make qualified withdrawals for retirement, after the age of 59 ½. As with a traditional IRA, you can only contribute up to the limits determined by the IRS each year..
529 Plans
529 plans are savings accounts meant specifically for educational expenses, such as college for your children or for yourself. Like an IRA, they are meant for long-term investments and are subject to the ebbs and flows of the market.
529 plan contributions are typically made post-tax and are not tax-deductible at the federal level when you put the money in the account, though some states do offer tax deductions. That said, 529 plans provide tax-free withdrawals for qualifying educational expenditures. There are no annual contribution limits and no age restrictions for beneficiaries.
However, you may be subject to a 10% penalty and pay federal and state taxes on any funds used for non-educational expenses.
Coverdell Education Savings Accounts
A Coverdell Education Savings Account (ESA) serves the same purpose as a 529 Plan: to save for qualifying educational purposes. But a Coverdell ESA has contribution limits and can only be opened for a child under the age of 18 years old, excepting those with special needs, as per the IRS. Also, it must be used before the beneficiary reaches age 30, though this also excludes those with special needs.
Coverdell ESA contributions are not tax-deductible, but qualifying withdrawals can be made tax-free.
Health Savings Accounts (HSAs)
A health savings account, or HSA, is a tax-advantaged plan for people who have high-deductible health plans (HDHPs). Since individuals with these plans may have higher out-of-pocket costs, an HSA can help make healthcare more affordable. Contributions are made with pre-tax dollars and can then be applied tax-free to qualified medical expenses, meaning you are basically getting those goods or services at a discount.
HSAs are not “use it or lose it” accounts; the funds can roll over year after year, and you may keep the money if you change jobs.
Points worth noting: If you use money from your HSA for non-qualifying expenses (say, you need cash for an urgent home repair), the withdrawal will be taxed, and you will be assessed a 20% penalty charge. That said, once you turn 65, funds in your HSA may be used for non-qualifying expenses without penalty. You will, however, incur taxes on funds withdrawn.
Filing Taxes on Savings Accounts
You must report any amount of earned interest from your savings accounts on your tax return. If you earn $10 or more a year in interest, your banking institution will generate an IRS Form 1099-INT form and send it to the IRS and a copy to you for your taxes.
The Takeaway
Most traditional savings accounts are taxed, meaning that the interest earned is taxable. If an account earns more than $10 in interest per year, you and the IRS will each receive a form 1099-INT reporting that money. In addition, certain tax-advantaged accounts, such as IRAs and ESAs, may or may not be taxable. Check the fine print on your account to know how to handle earned interest come tax season.
While interest you earn may be taxed, don’t let that stop you from saving. It can still be an important way to help your money grow.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
How much money can you have in your savings account without being taxed?
Any amount of money in a savings account will be taxed on the interest it earns. The financial institution where the funds are held will send a Form 1099-INT to the account holder and the IRS annually to reflect earned interest of $10 or more.
How can I avoid paying taxes on my savings account?
You cannot avoid paying taxes on any earned interest for a standard savings account. All interest earnings must be accounted for. Earned interest of $10 or more per account is reported on a 1099-INT and sent to the IRS.
How much tax do I pay on a savings account?
It depends on your tax bracket. Your earned interest will be taxed at your earned income rate for the year.
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SoFi members with direct deposit activity can earn 4.30% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.30% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.30% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/8/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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