How much tax do you pay on money market interest?
If the money market is held in a taxable account, the interest earned is taxed as ordinary income. For an investor with a money market account paying 5.3% and paying a combined 30% federal and state income tax rate, he or she will have an after-tax yield of 3.71%.
The earnings from money market funds can come from interest income or capital gains, so they're taxed the same way as other investment income.
Key takeaways
Disadvantages of money market accounts may include minimum balance requirements, monthly fees and transaction limits. Also, you might be able to find better yields with other deposit accounts.
- Invest in a tax-deferred account such as a traditional individual retirement account or a 401(k).
- Stash money in a tax-exempt account such as a Roth 401(k) or a Roth IRA.
The amount you will earn on $50,000 in a money market account depends on the annual percentage rate (APY) and the time period you leave the money in the account. For example, if you deposit $50,000 into a money market account that pays 4.5% APY and left it in your account for one year, you'd earn $2,303 in interest.
So, for example, let's say that you earned $10,000 in interest income and your marginal tax rate is 22% based on your 2025 federal income tax bracket. Using that information, the tax on your savings account interest would generally be $2,200.
Municipal money market funds invest primarily in short-term, municipal money market securities issued by states, local governments, and other municipal agencies. They pay interest that is generally exempt from federal income tax.
In short, CDs can be the right pick for medium- or longer-term savings goals when you know you won't need the money for a set period of time. If you want to maintain easy access to your cash, go for a money market account.
Federal regulations that govern savings account withdrawals don't apply to ATMs. So you can make unlimited ATM withdrawals from your money market account without penalty. Many banks also let you to write a limited number of checks from your money market account.
CDs tend to have higher rates than money market accounts, but give no access to your money until a term ends. Funds get locked up for a set period of months or years, and withdrawing early typically results in a penalty, such as several months to a year's worth of interest. Most often, CD rates are fixed.
How much tax do I have to pay on interest from savings?
Ordinary income: Interest earned on savings accounts is treated as ordinary income. This means it is taxed at your normal income tax rate, not at the lower rates that apply to capital gains or qualified dividends.
If you purchase a short-term CD that matures the same year it was purchased and earn $10 or more, you'll have to pay taxes on it for that year. If the term of such a CD spans over two calendar years, you'll need to pay taxes on the interest earned on two consecutive tax returns.
The IRS reporting threshold: The $10,000 rule
If you transfer or receive more than $10,000, the bank automatically files a Currency Transaction Report (CTR) with the government. ¹ This doesn't mean you owe taxes — it's simply a reporting requirement.
| Deposit Amount | Interest Rate (p.a.) | Monthly Interest Payout |
|---|---|---|
| ₹50,000 | 6.50% | ₹270 |
| ₹50,000 | 7.00% | ₹291 |
| ₹50,000 | 7.50% | ₹312 |
| ₹50,000 | 8.00% | ₹333 |
The right vehicles for cash and cash equivalents
Shorter-term cash needs of 0-6 months should generally be kept in liquid accounts, such as savings, checking, money market accounts or Treasury notes.
A 5.00% interest rate can significantly boost your savings. At this rate, your initial $100,000 would accrue $5,000 in interest each year. But monthly compound interest would boost that total even further. At the same 5.00% rate, monthly compound interest would result in a total of $5,116 at the end of the first year.
Interest you earn in a money market account is taxable as earned income. Any interest you earn on bank accounts, money market accounts, certificates of deposit (CDs), corporate bonds and deposited insurance dividends is taxable.
Does cashing in a CD count as income? You earn interest on the principal amount of your CD over time, yet only the amount that exceeds your initial investment usually counts as income.
Social Security income can be subject to federal income tax no matter how old you are. The IRS determines if your Social Security benefits are taxable based on income, not age. Generally, your Social Security benefits will be subject to federal tax when your total income is more than the thresholds listed above.
Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.
What is the best money market fund right now?
| Money market fund | Expense ratio | 7-day SEC yield |
|---|---|---|
| Vanguard Federal Money Market Fund (VMFXX) | 0.11% | 4.2% |
| Vanguard Treasury Money Market Fund (VUSXX) | 0.07% | 4.3% |
| Fidelity Money Market Fund (SPRXX) | 0.42% | 4.1% |
| Schwab Municipal Money Fund - Investor Shares (SWTXX) | 0.34% | 3.0% |
The Standardized 7-Day Current Yield is the average income return over the previous seven days. It is the Fund's total income net of expenses, divided by the total number of outstanding shares.
One downside to money market accounts is their high minimum deposit requirements. Some banks may require you to deposit a large amount to open an account or to qualify for the highest money market rates. This can be a barrier for some savers.
Earnings for a $10,000 CD deposit
The national average for a one-year CD is 1.78% APY, while the average one-year CD based on the banks we track at CNET is 4.04% APY. If you deposit $10,000 into a one-year CD that pays the national average of 1.78% APY, the value at maturity would be $10,178.00.
- Early withdrawal penalties. The biggest potential risk to your CD balance is fees. ...
- Bank failures. ...
- High-risk CDs. ...
- Fluctuating interest rates. ...
- Inflation.
