Do You Have To Pay Taxes on Money From a High-Yield Savings Account?
Written by
Daria Uhlig
Edited by
Susan Kim
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High-yield savings accounts help you grow your long-term savings. The accounts are as safe and accessible as traditional savings accounts, but they pay higher interest. However, that interest can have tax implications you should be aware of before you open your first high-yield savings account.
Do You Pay Taxes on an HYSA?
The short answer is yes. The interest you earn from your high-yield savings account is taxed as income. But that shouldn’t deter you from opening one — it’s still a great way to boost your savings.
4 Things To Know About Your High-Yield Savings Account
A high-yield savings account is a secure place to keep your money. While your savings won’t appreciate in value as dramatically as an investment account might, your funds are covered by FDIC or NCUA insurance, up to the coverage limits that apply.
Additionally, interest rates are about as high as they’ve been in over 20 years, and the best high-yield savings accounts are paying 4.50% APY or more.
Below are four more key facts you need to know about your high-yield savings account.
1. Interest Is Taxed as Income
Interest earned on high-yield savings accounts is taxed as earned income and must be reported to the IRS. If you earn at least $10 in interest, your financial institution will report your earnings to the IRS on Form 1099-INT. Earnings of less than $10 should still be reported on your tax return.
Because your interest earnings are taxed as income, the amount you owe depends on your IRS tax bracket. But despite the tax, your high-yield savings account will earn more in interest than a standard savings account.
2. Your APY Will Fluctuate
The annual percentage yield is a measure of how much interest you’ll earn on your savings account per year. However, APYs fluctuate over time as interest rates rise and fall. Still, an APY of even 3% is much higher than the national average of 0.46% as of Feb. 20.
3. You Should Look Into Online Banks
Online banks are usually the best banks for earning high yields on your savings because they have lower overhead than traditional banks.
This is also one of the downsides of HYSAs: Your current financial institution might not offer them, in which case you’ll have to open a bank account online. But you don’t need to switch all your accounts. You can have an online high-yield savings account and still maintain your standard checking account. Just be aware that it may take some time to transfer funds between banks.
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4. Withdrawals Might Be Limited
Most high-yield savings accounts come with withdrawal limits. Although the Federal Reserve lifted restrictions on withdrawals during the pandemic, many financial institutions still limit the amount of convenience withdrawals you can make each month to six.
Should I Put My Money in an HYSA?
An HYSA could be a good choice if you want to earn decent rates while maintaining easy access to your money. But it’s not your only option. If you won’t need your money for a while, consider opening a CD account instead. You could earn an even higher rate.
When saving for the long term, an individual retirement account might be a good option. You can use an IRA to invest in a money market fund that earns competitive rates with little risk to your investment. You’ll pay a penalty if you withdraw the funds before you turn 59 1/2; in the meantime, your contributions are a tax write-off — you won’t pay tax on them or the interest they earn until you withdraw money in retirement.
FAQ
High-yield savings account interest is just one tax consideration you should keep in mind when making decisions about your money. Here are some more:- What is the FICA tax rate?
- The FICA tax rate is 15.3% of your gross wages, split between you and your employer. Social Security receives 6.2% of your withholding, and Medicare receives 1.45%.
- What is the capital gains tax rate?
- Short-term capital gains are taxed at your federal income tax rate. Long-term capital gains tax rates vary from 0% to 20%, depending on your income.
- How long does it take to get a tax refund?
- Most taxpayers receive their refunds within 21 days, according to the IRS, but how long it takes to get your refund depends on whether you request a check or direct deposit (direct deposit is faster) and whether your return requires additional review.
Quinlan Grim contributed to the reporting for this article.
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- Federal Deposit Insurance Corp. 2024. "National Rates and Rate Caps"
- IRS. 2024. "What if I withdraw money from my IRA?"
