Interest Income: Savings, CDs and Treasury Bills
What cash can earn, where it is insured, and how interest is taxed
By the Monthly Income Booster editorial team · Updated · How we research and fact-check
On this topic
Interest income is what a bank, credit union or government pays you to hold your money. It is the lowest-risk income there is when the account is insured or government-backed, and the lowest-return over long periods, which is why it suits emergency funds and money you will need within a few years rather than long-term growth.
Where cash can earn interest
High-yield savings accounts, usually at online banks, pay more than a typical branch savings account and let you withdraw at any time. Certificates of deposit pay a fixed rate for a fixed term, with a penalty for early withdrawal. Money market accounts sit between the two. U.S. Treasury bills are short-term government debt bought through TreasuryDirect or a broker, and I bonds are inflation-linked savings bonds with a purchase limit of $10,000 per person per year that must be held at least 12 months. Rates on all of these move with the Federal Reserve's policy rate, so compare current rates rather than last year's.
Is it safe?
Deposits at FDIC-insured banks (and NCUA-insured credit unions) are protected up to $250,000 per depositor, per institution, per ownership category. Treasury bills and savings bonds are backed by the U.S. government. Money market funds at a brokerage are not bank deposits and are not FDIC-insured, even though they are generally low-risk.
How it is taxed
Interest is taxed as ordinary income in the year it is paid, and banks send a Form 1099-INT once it reaches $10. Interest on Treasury bills and savings bonds is exempt from state and local income tax, which can make them the better choice in high-tax states. Inside an IRA, interest grows without annual tax.
What goes wrong
Leaving savings in an account paying almost nothing, locking emergency money into a long CD, chasing a headline rate without reading the minimum balance or promotional period, and keeping long-term money in cash, where inflation can outpace the interest.
Interest is one of the three parts of portfolio income, along with dividends and capital gains.
Official sources
Tax rules, limits and pay data change. Check the current figures with the primary source before acting on them.
Frequently Asked Questions
How much interest will $10,000 earn?+
Multiply by the account's APY: at 4% it is about $400 over a year, at 3% about $300. Rates change often, so use the current APY from the bank.
Is interest income taxable?+
Yes, as ordinary income. Treasury and savings bond interest is exempt from state and local income tax.
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