CDs explained: Do you pay tax on CD interest?
Key takeaways
CDs offer fixed, predictable interest rates
Interest may compound during the CD term
Early withdrawals may incur penalties
CD interest is taxed as ordinary income
Tax deferral is possible with certain retirement, education, and health accounts
Certificates of deposit (CDs) are unique savings products that offer some of the highest interest rates available. Although they are a type of deposit account, they differ from traditional savings accounts in several key ways.
When opening a CD account, you commit to leaving a designated sum in your account for a predetermined period while locking in a fixed interest rate. Upon the date of maturity, you will gain access to your funds plus all accrued interest on your deposit. It is one of the safest and most predictable investments you can make, making it popular with those new to saving.
But do you pay tax on CD interest?
In this guide, we’ll discuss the rules surrounding CD accounts and taxation. Plus, we’ll answer the most frequently asked questions about this unique and lucrative savings product.
Top CD offers on Raisin
Bank
Product
APY
Maturity
mph.bank, a division of Liberty Savings Bank, F.S.B., Member FDIC
Member FDIC
Callable CD
4.00%
60 months
$2,000.00
Raisin is not an FDIC-insured bank or NCUA-insured credit union and does not hold any customer funds. FDIC deposit insurance covers the failure of an insured bank and NCUA deposit insurance coverage covers the failure of an insured credit union.
How CD interest works
When you open your CD account, the financial institution will offer you a fixed rate of interest for the term of the CD.¹ The length of CD terms can vary, ranging from a few months to several years. Often, but not always, a longer term is associated with higher interest rates. In contrast, short-term CDs often have lower interest rates but provide faster access to your funds.
Regardless of market fluctuations, this interest rate will not change. If you successfully leave your funds in the account until the maturity date, you are guaranteed to earn that interest.
Compounding interest
Depending on your CD, interest may compound daily, weekly, monthly, or annually. During this process, your interest is added to your principal deposit. Interest earned in the future will be calculated based on your principal plus interest earned to date.
Payout and withdrawing funds
In most cases, you may face a penalty for withdrawing funds early. This can cause you to lose interest earned on your principal. However, if you keep funds deposited until the date of maturity, you can withdraw the total amount, including all interest accrued.
If you may need access to your funds before the date of maturity, you may want to look into no-penalty CDs, which typically allow you to withdraw all funds and accrued interest prior to the maturity date, without any early withdrawal fees. In exchange, no-penalty CDs typically offer a lower interest rate in comparison to high-yield CDs.
Automatic renewal
You should be aware that some CDs renew automatically at the end of the term. In other words, both the principal and interest will be reinvested into a new CD.
If you are enrolled in automatic renewal and you wish to withdraw funds, you will need to take action during your grace period, typically the first 7 days after renewal. If you fail to act, you’ll likely be locked into a new term and face penalties for early withdrawal.
Do you have to pay taxes on CD interest?
Yes, you must pay taxes on CD interest, even before maturity.
The IRS considers CD interest to be taxable income, even if you reinvest your money right away.² That means that CD interest becomes taxable when it’s earned, not when it’s withdrawn.
Do you pay taxes on CD interest before maturity?
Each year, you must report your interest income to the IRS, whether or not your CD has reached maturity. You can do this by filling out a 1099-INT form.³ You will be responsible for paying taxes on those funds. Thus, taxes can reduce your return on investment and should be a consideration when opening an account.
For CD terms longer than one year, you only owe taxes on new interest accrued during the given tax year.
The exception is if you place your CD in a tax-advantaged retirement account. In such cases, taxes on your CD will typically be deferred until withdrawal.
Do you pay state taxes on CD interest?
Yes, all CD interest is taxable at the state and federal levels. If your state assesses income taxes separately, you must also report your CD interest to the state. Depending on your location, local taxes may also apply. We recommend consulting a tax professional to ensure you file correctly.
How much tax do you pay on CD interest?
The IRS taxes CD interest of $10 or more as ordinary income, not as capital gains. You will owe your individual federal income tax rate based on your total taxable income and filing status.
As of 2024, the federal income tax brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%.⁴ You will owe that percent of the total CD interest accrued for the year. If you are unsure about your tax bracket, consult a tax professional for assistance.
Do I owe taxes on CD interest if I withdraw funds early?
If you withdraw CD funds early and are charged a penalty, you will report this on your 1099-INT form. Your taxes will be adjusted appropriately, and you will not owe tax on penalties paid or on interest you did not earn.
How do I avoid paying taxes on CD interest?
In most cases, you cannot avoid paying taxes on CD interest. However, there are several ways to delay paying taxes. Furthermore, those who qualify can avail themselves of a few unique tax advantages.
These include:
- Opening a CD with a tax-deferred retirement account, such as an IRA
- Investing in CDs using funds from your 529 plan and use your interest to pay for qualifying educational expenses
- Opening a CD with HSA funds and use your interest to pay for qualifying health expenses
Many rules and restrictions apply. Consult a financial professional to ensure your expenses and accounts qualify.
Interested in learning more about how to optimize your savings? Our taxes hub has everything you need to know about saving money, investing, retirement, and more.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
Sources
¹ https://www.treasurydirect.gov/marketable-securities/understanding-pricing/
² https://uscode.house.gov/view.xhtml?req=(title:26%20section:63%20edition:prelim)
³ https://www.irs.gov/forms-pubs/about-form-1099-int
⁴ https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024
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*APY means Annual Percentage Yield. APY is accurate as of April 26, 2026. Interest rate and APY may change after initial deposit depending on the terms of the specific product selected. Minimum opening deposit is $1.00.
Raisin is not an FDIC-insured bank, and FDIC deposit insurance only covers the failure of an insured bank.
Raisin is not an NCUA-insured credit union. NCUA deposit insurance only covers the failure of an insured credit union.
Raisin does not hold any customer funds. Customer funds are held in various custodial deposit accounts. Each customer authorizes the Custodial Bank to hold the customer’s funds in such accounts, in a custodial capacity, in order to effectuate the customer’s deposits to and withdrawals from the various bank and credit union products that the customer requests through Raisin.com. The Custodial Bank does not establish the terms of the bank or credit union products and provides no advice to customers about bank or credit union products offered by the applicable bank or credit union through Raisin.com. Each customer also authorizes the Service Bank to move funds among the various banks and credit unions at the customer’s request. First International Bank & Trust (FIBT), Member FDIC, is the Service Bank. Bell Bank and Starion Bank, each Member FDIC, are the Custodial Banks.
†Based on $250,000 in FDIC or NCUA insurance coverage per insurable category of ownership at each partner bank or credit union on the Raisin platform (each a "Product Bank"), when aggregated with all other deposits held by you at such Product Bank and in the same insurable category. Deposits made through Raisin will be eligible to receive deposit insurance from the FDIC or the NCUA (each a "Deposit Insurer") in accordance with and up to the maximum amount permitted by law at each Product Bank. Raisin is not a bank or credit union and does not hold any customer funds. Funds are held at FDIC-insured banks and NCUA-insured credit unions. Deposit insurance covers the failure of an insured bank or credit union. Certain conditions must be satisfied for pass through deposit insurance coverage to apply. Customers may choose to deposit funds with identically registered accounts at different Product Banks on the Raisin platform to be eligible for Deposit Insurer coverage up to $10 million for individual accounts and $20 million for joint accounts when at least 40 Product Banks are utilized. Please be aware, however, that any deposits you have at a Product Bank, whether through the Raisin platform or outside the Raisin platform, that you may hold in the same capacity (such as in an individual capacity or joint capacity) count toward the applicable Deposit Insurer's deposit insurance maximum amount, and any such amounts that you hold in the same capacity at a Product Bank that exceed the maximum insurance coverage by the applicable Deposit Insurer will not be insured. For more information on FDIC deposit insurance, please see here. For more information on the NCUA share insurance fund, please see here. You are solely responsible for monitoring the amount of funds you have on deposit at each a Product Bank, whether through the Raisin platform or outside the Raisin platform, to confirm that the deposits you hold in the same capacity at each Product Bank do not exceed the maximum deposit insurance coverage provided by the applicable Deposit Insurer.