If you purchase a certificate of deposit (CD), in most cases, you’ll pay taxes on CD interest. This is one disadvantage that makes other savings strategies — like annuities — stand out compared to CDs.
Read on to better understand how interest income is taxed for CDs.
When you buy a CD, you agree to deposit money with a bank for a fixed period of time at a fixed interest rate that won’t change during your CD’s term. In exchange for this commitment, banks generally pay higher interest on CDs than checking and savings accounts.
Then, when your CD reaches its maturity date, you receive your principal investment plus accrued interest. At this point, you have a choice to keep the proceeds or roll all or part of them into a new CD.
Financial institutions offer CDs with different terms, typically ranging from a few months to one year or more. And fixed interest rates accompany all contracts.
CDs earn compound interest, so the interest you earn is regularly added to your original deposit. Future interest accrual is based on this new total amount — this continuous process is called compound growth.
CD interest is taxable. While this isn’t great if you prefer having tax-deferred growth, it can benefit individuals in a lower tax bracket today than they expect to be in during retirement.
At the end of the year, your bank will send you a 1099-INT form if you earned $10 or more interest income during the year. If, for some reason, you don’t receive a 1099-INT, you still need to report interest income earned during the tax year you earned it (you can likely request this form from your bank to get the details you need).
When you file your taxes, you or your accountant will input the information from all of your 1099-INTs, which include interest earned on all bank deposit accounts, including CDs. If you have a multi-year CD, you’ll receive a 1099-INT during each year the CD is open. You must report this income annually using the data from your 1099-INT.
The IRS treats interest income like ordinary income — your interest income tax rate is the same as your income tax rate. So, you’re just adding interest you earned on your CDs to your taxable income.
Pro tip: When you see the annual percentage yield (APY) on a CD, be mindful that you won’t keep the full amount of interest earned in your pocket. Instead, come tax time, the IRS takes their share.
If you meet the requirements to own a 401(k) or traditional IRA account and don’t exceed IRS limits on annual contributions, you can hold a CD inside one of these accounts. With this method, you can avoid paying taxes on interest income until you start taking withdrawals.
You could also use a Roth IRA account to avoid taxes altogether, as long as you follow IRS rules, effectively making earnings on your certificate of deposit tax exempt interest income.
Yes — but only on the interest earned. Here’s an example.
Consider a $5,000 deposit in a one-year CD account with an APY of 4.0%. At the end of one year, you’ll have earned $200 in interest income.
When you receive your 1099-INT from the bank, assuming you earned no other interest income from that institution, you’ll see $200 in box 1. This represents interest earned. This is the only amount the IRS collects taxes on — your initial $5,000 deposit is an untaxed return of capital.
If you take an early withdrawal from your CD, your bank will charge a penalty, usually equal to a few months or more of interest. You can deduct this penalty from your taxable income when filing your taxes.
So, cashing out your CD early doesn’t mean paying taxes on your initial contribution, but you’ll likely owe penalties for early withdrawal.
Annuities are a great alternative to CDs, with many contracts offering tax-deferred growth and higher interest rates.
An annuity is a contract between you and an insurer. In exchange for a lump sum contribution or series of regular contributions, the insurance company distributes your annuity proceeds (principal investment plus earnings) to you, usually in retirement.
While you can take these payouts as a lump sum, to generate consistent guaranteed income in retirement, you can receive them in intervals over a fixed time frame or, in some instances, for life.
It depends on your tax bracket. The IRS treats interest income like ordinary income, so the rate you pay depends on your total taxable income, after deductions, credits, and other adjustments — all of this will affect your tax return.
CD interest accrues throughout the year. When you file your taxes, you’re responsible for tax due on all interest earned in the previous year. For example, in early 2026, you’ll file your taxes for the 2025 tax year. At this point, you’ll pay taxes on the CD interest income you earned in 2025.
You report CD interest income on your taxes using the information your bank provides on your 1099-INT tax form.
You can avoid paying taxes on interest income, including from CDs, if you hold an interest-generating account inside a tax-advantageous retirement account such as a 401(k) or IRA. Make sure you’re eligible to own and contribute to these accounts and that you don’t exceed IRS limits on annual contribution amounts. As an example, if you want to invest $20,000 in a CD, it’s unlikely you can do it inside an IRA.
This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.
