The day has arrived: Your money is finally coming home. Your certificate of deposit (CD) is maturing, and now your interest, plus your deposit, is once more in your control. It’s a day you’ve been awaiting for, how long again? Three months, six months, two years?
It’s a great feeling to have all that CD interest land in your hands at once. The only thing that would make this moment better is if you didn’t have to pay taxes on your CD earnings.
Like high-yield savings accounts, CD interest above $10 is taxable on state and federal levels. Depending on your tax rate, that could cut out a sizable portion of your earnings. But not all CD holders will pay taxes on their interest. If you hold your CD in certain tax-advantaged accounts, you can avoid taxes altogether. Here are three options to consider.
1. Health savings account (HSA)
HSAs are tax-advantaged accounts that let you save and invest for medical expenses. Most HSAs give you plenty of options to invest your contributions, such as stocks, ETFs, and mutual funds. Likewise, CDs are usually among this mix.
Our Picks for the Best High-Yield Savings Accounts of 2024
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Capital One 360 Performance Savings 
APY 4.25%
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APY 4.25%
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Min. to earn $0 |
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CIT Platinum Savings 
APY 5.00% APY for balances of $5,000 or more
Min. to earn $100 to open account, $5,000 for max APY
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APY 5.00% APY for balances of $5,000 or more
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Min. to earn $100 to open account, $5,000 for max APY |
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American Express® High Yield Savings 
APY 4.25%
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APY 4.25%
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Min. to earn $0 |
Like bank CDs, HSA CDs can give you a fixed interest rate for guaranteed returns. But whereas interest on a bank CD is considered taxable income, interest earned in an HSA isn’t taxed — so long as you use the funds for medical expenses.
That last part is important. You can withdraw HSA money at any time. But if it’s not used for a qualified medical expense, you’ll pay a penalty tax. As long as you obey that stipulation, opening a CD in an HSA would bypass paying federal and state taxes on your interest.
2. Retirement accounts
You can avoid paying taxes on interest now by opening a CD in a tax-advantaged retirement account, like an individual retirement account (IRA) or 401(k).
Technically, you’re not avoiding CD taxes in these accounts; rather, you’re deferring them. Both 401(k)s and traditional IRAs only levy taxes on your withdrawals in retirement. This is a smart idea when you expect your tax rate in retirement to be lower than it is now. Instead of paying at your current higher tax rate, you can defer tax liability when your bill would be lower.
One thing to note is that CDs in retirement accounts won’t be bank CDs. More than likely, they’re brokered CDs. A brokered CD doesn’t give you the option to break your contract early to make an immediate withdrawal. Instead, you have to sell the brokered CD on a secondary market, which could result in a gain (or loss).
3. 529 plans
Finally, you can avoid taxes on interest by opening a CD in a 529 plan. This account lets you save for educational expenses, like tuition or housing. As long as you use funding in this account on qualified educational expenses, you won’t have to pay taxes on your earnings.
Although these three accounts can help you avoid taxes on CD earnings, they each have their own limitations. Unlike a regular bank CD, you won’t have unlimited flexibility to use your CD earnings toward whatever you want. However, if you’re already contributing to one or more of these accounts, opening a CD might not be such a bad idea.
Just check that your CD rate can match the best CDs on our list. You still want to maximize your interest, no matter where the CD ends up.