Savings accounts help you earn money and prepare for financial rainy days. They also protect your savings from loss due to bank failures, fire, theft, and more. But if you’re earning interest on a savings account, there is one downside: the taxes.
For most savings accounts, the IRS takes a portion of the interest you earn. With that said, not all savings accounts are subject to taxes, and some offer tax-free or tax-deferred ways to save money and earn interest.
Whether you’re planning for retirement, medical expenses, or college tuition, one of these accounts could be the key to earning interest while keeping more of your money.
Read more: Do you have to pay taxes on your savings account?
A traditional IRA is a retirement savings account that can give you a major tax break. The money you contribute to your account is generally pretax, meaning it can lower your taxable income and reduce your overall tax bill.
As the money grows in your IRA, it’s “tax-deferred,” meaning you won’t pay taxes until you make withdrawals. This allows your investments to grow more over time, thanks to compound returns.
This type of account can be a good option if your goal is to save and invest for the future, and if you don’t need the money until you reach retirement. It shouldn’t replace your emergency savings fund, since taking money out before retirement usually comes with steep penalties.
Read more: What is an IRA CD?
A Roth IRA is also a retirement savings account, but it has different tax advantages than a traditional IRA.
Your contributions to a Roth IRA are made with after-tax dollars, meaning you’ve already paid taxes on the money, so they don’t give you a tax break up front. However, when you make withdrawals in retirement, you don’t have to pay taxes on the principal or the earnings.
Like a traditional IRA, pulling out money before retirement age can result in major penalties, so a Roth IRA is not the right place to keep your emergency fund.
Read more: How do Roth IRA taxes work?
Many companies offer 401(k)s, which are a common type of employer-sponsored retirement plan. The contributions you make to these accounts are typically pretax, so you’ll have to pay taxes when you make withdrawals, but they reduce your taxable income for the year they’re made.
Another major perk? Some employers offer matching contributions up to a certain percentage of your salary. That’s free money that can help you reach your retirement goals even faster.
Read more: 401(k) vs. IRA: The differences and how to choose which is right for you
If you want to save money for a child’s education, a 529 college savings plan is a great option. There’s no up-front advantage when it comes to your federal taxes, but the money you deposit to a 529 does grow tax-deferred. Plus, withdrawals for qualified education expenses like tuition, books, and housing are exempt from taxes.
Your state may also offer tax deductions or credits for contributions to a 529 plan to give you extra savings.
Watch: 529 plans: A guide to saving for your child’s higher education
If you have a high-deductible health plan (HDHP), you’ll want to look into opening a health savings account (HSA) too.
Withdrawals from your HSA for qualified medical expenses are tax-free, and you can choose to contribute pretax dollars — up to $4,300 for 2025 — from each paycheck or deduct your HSA contributions on your tax return.
Read more: What is a health savings account (HSA)?
Want to reduce your tax bill even further? There could be better strategies than just moving your savings to a tax-advantaged account. Talk to a tax professional to see if any of these options could work for you.
Maximize deductions and credits
You might qualify for a common tax deduction that reduces your taxable income or a tax credit that reduces the amount you owe. Common deductions and credits include:
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Student loan interest deduction
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Education credits
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Earned Income Tax Credit
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Self-employment expense deductions
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Paid alimony
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Mortgage interest deduction
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Clean vehicle tax credit
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Home energy tax credit
Tax-loss harvesting is one of the more complicated ways to reduce your tax bill, so you’ll want to give it careful consideration before jumping in.
To use this strategy, you have to intentionally sell some of your investments at a loss, meaning you sell them for less than you paid, and then you reinvest the money elsewhere. When you do this, you reduce your overall investment income and, as a result, reduce the amount of capital gains tax you owe.
