Are High-Yield Savings Account Earnings Taxed?

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High-yield savings accounts help you grow your long-term savings by earning interest. As interest rates continue to rise in 2023, you can take advantage of high APYs to maximize your savings. But before you open your first high-yield savings account, you might be wondering: Do I get taxed on a high-yield savings account?

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. Below, we’ll dig into the tax details and four other key things you need to know about your high-yield savings account. 

4 Things To Know About Your High-Yield Savings Account

If you’re debating between investing or saving your money, there are a few things you should know. First, a high-yield savings account is a secure place to keep your money. While your high-yield savings won’t appreciate in value as dramatically as an investment account might, you can rest assured that your funds are covered by FDIC or NCUA insurance, up to the coverage limits that apply.

That’s why a high-yield savings account is a great option for storing your emergency funds and other short-term savings. 

Second, interest rates are currently at a 22-year peak, so now is a great time to start saving money in a high-yield savings account. 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 have to 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 2023 tax bracket. Just remember that income is taxed as a percentage, so regardless of your tax bracket, you’ll never owe more on your interest than you earn. Your high-yield savings account will still earn more in interest than a standard savings account, despite the fact that you’ll pay taxes on the interest. 

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. Because interest rates are currently high, financial institutions are offering high APYs for their high-yield savings accounts — some over 5%. 

However, a 5% APY offer doesn’t mean you’re locked into that APY for as long as you own your account. APYs will fluctuate over time as interest rates rise and fall. Still, an APY of 3% or even 2% is much higher than the national average APY for savings accounts, which is 0.43% as of Aug. 21.  

3. You Should Look Into Online Banks

The best high-yield savings accounts are generally offered by online banks. Because traditional banks have higher overhead costs (staffing and maintaining in-person branches), they can’t offer interest rates as high as those of online-only banks. 

This is one of the downsides of high-yield savings accounts: You probably can’t open one with your traditional bank. But you don’t need to switch all your banking to an online-only bank if you want to open a high-yield savings account. You can have an online high-yield savings account and still maintain your standard checking and savings accounts. Just be aware that it may take some time to transfer funds between banks.

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 convenient withdrawals you can make each month. 

Depending on your bank, you might be restricted to six monthly withdrawals from your high-yield savings account. That’s why you shouldn’t rely on it for regular monthly spending. If your bank imposes such restrictions and an excessive transaction fee for going over the limit for your account, you’ll need to keep the limit in mind if you intend to make multiple transfers from your high-yield savings account to your checking account per month.

Final Take

There are pros and cons to opening a high-yield savings account. You can earn multiple times the amount of interest compared to a standard savings account, but you’ll also have to pay taxes on that interest, and your APY may fluctuate over time. 

That said, opening a high-yield savings account is always a good idea. These accounts are secure, easy to maintain, and allow your savings to appreciate in value more than in a normal savings account. Interest rates are currently high, so now is a great time to open your high-yield savings account and start saving. 

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