Withdrawals themselves are not taxed

When you take money out of a savings account, you do not pay income tax on the withdrawal itself. The money you withdraw is yours — you already earned it, and you already paid taxes on it when you received it as income. Withdrawing it does not create a new tax event.

The only time a savings account withdrawal triggers a tax bill is if you withdraw the interest your account has earned. Interest is treated as income by the IRS, and you owe tax on it in the year it is credited to your account, whether you withdraw it or leave it sitting there.

Key Takeaways

  • Withdrawing your own money from a savings account is never taxed — you are taking back what you deposited.
  • Interest earned on a savings account is taxed as income in the year it is credited, even if you do not withdraw it.
  • Your bank will report interest of $10 or more on a Form 1099-INT, which you must report on your tax return.
  • If you withdraw money that includes earned interest, only the interest portion is subject to tax, not the principal.
  • Some savings accounts earn so little interest that no tax reporting is required, but you still owe tax on any interest you do earn.

How interest gets taxed when you withdraw it

When you withdraw money from a savings account, the withdrawal itself contains two parts: the principal (the money you put in) and the interest (the money the bank paid you for letting them use your funds). Only the interest is taxable income.

The tax is owed in the year the interest was credited to your account, not in the year you withdraw it. If your account earned $50 in interest in 2024, you owe tax on that $50 in 2024, even if you do not withdraw the money until 2025. This is called the accrual method of accounting — the IRS taxes you when you earn the money, not when you receive it.

When you do withdraw the money, your bank has already deducted the interest from your account balance. You are straightforward moving it to another account or spending it. The tax obligation was already created when the interest was earned.

What your bank reports to the IRS

If your savings account earned $10 or more in interest during the year, your bank will send you a Form 1099-INT by January 31 of the following year. This form lists all the interest your account earned. Your bank also sends a copy to the IRS.

You must report the amount shown on the 1099-INT on your tax return, even if you did not withdraw the money. The IRS cross-checks your return against the 1099-INT your bank filed, so reporting it is essential. If you earned less than $10 in interest, your bank may not send a 1099-INT, but you still owe tax on the interest — you just have to track it yourself and report it on your return.

If you have multiple savings accounts at different banks, each bank will send its own 1099-INT. You add up all the interest reported on all your 1099-INTs and report the total on your return.

Withdrawals from special savings accounts

Some savings accounts have restrictions on withdrawals — for example, certificates of deposit (CDs) charge a penalty if you withdraw before the maturity date. The penalty itself is not tax-deductible, but it does reduce the amount of money you actually receive. You still owe tax on the interest earned, regardless of whether you paid a penalty.

High-yield savings accounts and money market accounts work the same way as regular savings accounts: you pay tax on the interest, not on the withdrawal. The higher the interest rate, the more tax you will owe on the earnings.

If you have a savings account at a credit union instead of a bank, the same rules explore. Credit unions report interest on 1099-INT forms just like banks do.

When you might owe no tax on interest

If your total income for the year is very low, you may not owe any income tax at all, even if you earned interest. The IRS sets a standard deduction — an amount of income you can earn before you owe federal tax. For 2024, the standard deduction is $14,600 for a single person and $29,200 for a married couple filing jointly, though these amounts change each year.

If your total income (including interest) is below the standard deduction for your filing status, you do not owe federal income tax. However, you may still need to file a return to claim a refund of taxes withheld from paychecks or to claim tax credits. Check the IRS website or speak with a tax professional about whether you need to file.

State and local income taxes may also explore to interest earned, depending on where you live. Some states do not tax interest income, while others do. Your bank's 1099-INT will show only federal tax reporting — you will need to check your state's rules separately.

How to report interest on your tax return

When you file your federal income tax return, you report interest income on Schedule B (Interest and Ordinary Dividends) if you earned more than $1,500 in interest during the year. If you earned $1,500 or less, you can report it directly on the main form (Form 1040) without using Schedule B.

You will need the information from your 1099-INT forms. List each account separately if you have multiple accounts, or add them together and report the total — the instructions on the form will tell you which approach to use. The total interest you report on your return must match the total reported to the IRS on your 1099-INTs, or the IRS may contact you to explain the difference.

Frequently Asked Questions

If I withdraw all my money from a savings account, do I owe taxes on the full amount?

No. You owe tax only on the interest the account earned, not on the principal you deposited. If you put in $5,000 and earned $50 in interest, you withdraw $5,050 total, but you owe tax only on the $50. The $5,000 is your own money and was already taxed when you earned it.

What if I earned interest but did not get a 1099-INT form?

If you earned less than $10 in interest, your bank may not send a 1099-INT. You still owe tax on that interest. You will need to track it yourself — check your account statements or contact your bank for the total. Report it on your tax return even though you did not receive a form.

Can I deduct the penalty I paid for early withdrawal from a CD?

No, the penalty itself is not deductible. However, if the penalty was large enough, you may be able to deduct it as an adjustment to income on your tax return — check the IRS rules or speak with a tax professional about your specific situation. You still owe tax on the interest earned, regardless of the penalty.

Do I owe taxes on interest if I do not withdraw it?

Yes. The IRS taxes you on interest in the year it is credited to your account, whether you withdraw it or leave it there. If your account earned $100 in interest in 2024 but you did not touch the money, you still owe tax on that $100 in 2024.

What if my savings account earned almost no interest?

You still owe tax on whatever interest was earned, even if it is just a few cents. If the amount is less than $10, your bank will not send a 1099-INT, but you must still report it on your return if you are required to file. Check your account statements for the exact amount.