The interest you earn on your traditional or high-yield savings account is considered taxable income. You won’t pay interest on your deposits, but you will pay a savings account tax on any interest you accrue during the year, which the Internal Revenue Service (IRS) considers ordinary income.

Do I get taxed on my savings account?

All interest that you earn on a savings or checking account is taxable as ordinary income, making it equivalent to money that you earn working at your day job. By law, all interest earned on a savings account is taxable, even if it is just a few dollars per year.

What’s the tax rate on a high yield savings account?

For example, if your effective tax rate is 22%, you will pay 22% in taxes for the income received. To be clear, you’re never taxed on your contributions to any high-yield account, only on your earnings.

How is interest paid on a savings account taxed?

If the interest accrued in your account is greater than $10 for the year, then all interest income is included in your gross income, along with any salaries, wages, and tips, and is taxed as ordinary income. This means that interest income you receive will be taxed at your marginal tax rate after all the appropriate deductions have been taken.

How are savings accounts help reduce your tax bill?

There are two ways that savings accounts can reduce your tax bill. Some accounts let you deposit pre-tax money, reducing your taxable income in the year you make the contribution. Other accounts allow the money you put in to earn interest tax-free, reducing your tax burden in the future.

Do you need a minimum deposit to open a high yield savings account?

Many of the best high-yield savings accounts require a minimum opening deposit of $100 or less. Not only do some high-yield savings accounts require a minimum deposit to open an account, they may also require a minimum balance to earn the APY or avoid fees.