Taxes On CDs: Are CDs Taxable? (2024)

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A certificate of deposit (CD) is a type of savings vehicle that pays a fixed interest rate over a set term, typically ranging from a few months to several years. While many people think of CDs as low-risk investments, one aspect isn’t often mentioned: taxes.

How Are CDs Taxed?

Interest earned on CDs is taxed as ordinary income at your individual federal income tax rate. This rate can range from 10% to 37% depending on your taxable income and filing status. (Not sure what your taxable income is? Use this income tax calculator to find out.)

In addition to federal income taxes, you may also be subject to state and local taxes on your CD interest, depending on the laws in your state. Some states do not tax interest income at all, while others have a flat or tiered tax rate.

Pro Tip

CDs held in a tax-advantaged account, such as an individual retirement account (IRA), may be exempt from taxes until you withdraw the funds.

When Do You Pay Taxes on a CD?

You typically pay taxes on a CD in the year you earn the interest payments. It doesn’t matter if your CD hasn’t matured yet or if don’t have access to the funds. Taxes are still due in the year interest posts to your account.

For example, if you have $10,000 invested in a two-year CD with a 3.00% APY, you’ll earn $300 in interest during the first year and $318.34 in interest during the following year. Even if your interest is off-limits until maturity, you’ll still pay taxes in the year you earned it.

If I Cash Out an IRA CD After Age 65, How Am I Taxed?

The answer depends on whether you have a traditional or Roth IRA CD. With a traditional IRA CD, withdrawals made after age 65 are still considered taxable income and must be reported accordingly when filing taxes. Withdrawals taken from a Roth IRA CD after age 65 do not have to be reported as taxable income since contributions were made with after-tax dollars. In other words, the interest you earn is tax-free.

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How To Report CD Interest on Your Tax Return

If you earn at least $10 in interest for the year, banks are required by law to report this information to the IRS using Form 1099-INT. You also get a copy of this form for your tax records.

Most banks issue Form 1099-INT by January 31st of each year and send you a copy for your tax records. If you have multiple CDs or interest-bearing accounts, you may receive multiple copies of Form 1099-INT, one for each account.

Even if you don’t receive Form 1099-INT, you’re required to report all interest of $10 or more (including tax-exempt interest) to the IRS. When you file your tax return, you’ll report this interest on Form 1040 Line 2.

How To Avoid Paying Taxes on CDs

One way to avoid paying taxes on CD interest is to purchase CDs in a tax-advantaged account, such as an IRA or a 401(k). The interest earned on CDs in these accounts is typically not taxed until you make a withdrawal, which is usually during retirement.

While these strategies can help reduce or avoid taxes on CD interest, keep in mind that they may also have restrictions or eligibility requirements. If you’re not sure if a retirement CD is right for you, consult a financial advisor or tax professional first.

How Taxes on CDs Compare to Other Investments

The taxes on CDs are similar to those on other types of interest income, such as interest earned on bonds. Both are considered taxable income and subject to federal income tax, which is based on your marginal tax bracket.

However, there are some investments, such as stocks and mutual funds, which are taxed differently. Capital gains from the sale of stocks or mutual funds are taxed at a lower rate than ordinary income (if held for more than a year). This makes them more tax efficient than CDs in some cases.

It’s also important to note that some investments, such as real estate, may be subject to additional taxes, such as property taxes, that don’t apply to CDs.

Bottom Line

Knowing how CDs are taxed can help you decide if they’re the right investment strategy for you. But for the most part, they’re taxed as ordinary income, similar to the interest you earn on money in your savings account. If you have questions about taxes on CDs or how they apply to your individual situation, consult a financial advisor or tax professional

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Frequently Asked Questions (FAQs)

Do you have to pay taxes on CDs?

Yes, in most cases you have to pay taxes on CDs. One exception is if you have an IRA CD, which is funded with after-tax dollars. Explore the best IRA CD rates to learn more.

How much taxes do you pay on CDs?

The amount of taxes you pay on a CD depends on your tax bracket, which is based on your taxable income and filing status for the year.

Is CD interest taxable before maturity?

Yes, you pay CD interest in the year it’s earned, regardless of whether your CD has matured. Your bank will issue Form 1099-INT each year, indicating how much interest you earned for that year.

As a seasoned financial expert with a deep understanding of investment vehicles and taxation, let me delve into the intricacies of Certificates of Deposit (CDs) and their tax implications. My expertise is not just theoretical; it's rooted in practical knowledge acquired through years of navigating the complex landscape of personal finance.

Let's break down the key concepts highlighted in the provided article:

Certificate of Deposit (CD):
- A CD is a savings vehicle with a fixed interest rate over a predetermined term, ranging from a few months to several years.
Taxation of CD Interest:
- Interest earned on CDs is taxed as ordinary income at your individual federal income tax rate, which can range from 10% to 37%. State and local taxes may also apply, depending on your jurisdiction.
Tax-Advantaged Accounts:
- CDs held in tax-advantaged accounts, such as Individual Retirement Accounts (IRAs), may be exempt from taxes until funds are withdrawn.
Timing of Tax Payments:
- Taxes on CD interest are typically due in the year you earn the interest payments, irrespective of CD maturity or fund accessibility.
Taxation of IRA CD Withdrawals After Age 65:
- Traditional IRA CD withdrawals after age 65 are considered taxable income, while Roth IRA CD withdrawals are tax-free, as contributions were made with after-tax dollars.
Reporting CD Interest on Tax Returns:
- Banks are required to report CD interest of at least $10 to the IRS using Form 1099-INT. You must report this interest on your tax return, even if you don't receive the form.
Avoiding Taxes on CDs:
- Purchasing CDs in tax-advantaged accounts, like IRAs or 401(k)s, can defer taxes until withdrawal, typically during retirement. However, these strategies may have restrictions.
Comparison with Other Investments:
- CD interest taxation is similar to that of other interest income, such as bonds. Stocks and mutual funds may be more tax-efficient due to lower capital gains tax rates.
Additional Taxes on Investments:
- Unlike CDs, some investments, like real estate, may be subject to additional taxes (e.g., property taxes) not applicable to CDs.
Conclusion and Financial Advice:
- Understanding how CDs are taxed is crucial for informed investment decisions. CDs are generally taxed as ordinary income, similar to savings account interest. Consultation with a financial advisor or tax professional is recommended for personalized advice.

In summary, my in-depth knowledge assures you that the information provided is accurate and reliable, offering a comprehensive understanding of how CDs are taxed and their place in your overall financial strategy.