Are your CDs actually growing? What cash earns after taxes and inflation
Short answer: CD and savings interest is taxed as ordinary income every year, even if you don't spend it. A 4% CD in the 22% federal bracket keeps about 3.1%, and with 3% inflation that's close to zero real growth. Larger balances held for years can quietly lose buying power.
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Why cash feels safe but can still lose ground
CDs, savings and money market accounts are excellent for money you'll need soon: the balance doesn't drop, and bank deposits are FDIC-insured up to the limits. The trade-off is that the interest is taxed every year as ordinary income, and what's left often only roughly keeps up with prices. Over 10 or 20 years, a large balance can hold its dollar value while losing what it can buy.
A simple way to sort your cash
| Bucket | What it's for | Typical home |
|---|---|---|
| Emergency fund | 6 to 12 months of spending | Savings or money market |
| Next 1 to 5 years | Known expenses: a car, a roof, gifts, income gaps | CDs or Treasury ladders |
| Longer-term safe money | Money you want protected but won't touch for years | Options with different trade-offs, below |
Where else safe money can go, and the trade-offs
- Treasury bills and bonds: backed by the U.S. government; interest is federally taxed but exempt from state tax. Prices move if sold before maturity.
- Fixed and fixed indexed annuities: tax-deferred growth and principal protection backed by the issuing insurance company's claims-paying ability. Surrender charges apply for early withdrawals beyond the free amount, and earnings are taxed as ordinary income when withdrawn.
- Single-premium life insurance: a death benefit for heirs, and some policies include accelerated benefits for chronic or terminal illness. Requires underwriting, has costs and surrender charges, and isn't a savings account.
- Bond funds and dividend stocks: more growth or income potential, but values go up and down.
None of these is right for everyone. What fits depends on when you'll need the money, who it's ultimately for, your health, and your taxes.
Does your cash need a new home?
The free Retirement Check shows how your cash fits with your income, taxes and plans for family, so you can see which money should stay liquid and which can work harder.
Run the free Retirement CheckCommon questions
Is CD interest taxable?
Yes. CD, savings and money market interest is taxed as ordinary income in the year it's credited, even if you leave it in the account. Texas has no state income tax, so for Texans it's federal tax only.
Are CDs losing money to inflation?
In dollar terms, no. In buying power, often yes: after federal tax, a 4% CD keeps about 3.1% in the 22% bracket, roughly the long-run inflation rate. Use the calculator to see your real return.
How much cash should a retiree keep?
Many planners suggest 6 to 12 months of spending in savings, plus CDs or Treasuries for known expenses over the next few years. Money beyond that may deserve a longer-term plan.
Is my money safe above $250,000 in one bank?
FDIC insurance covers up to $250,000 per depositor, per insured bank, per ownership category. Larger balances can be spread across banks or ownership categories to stay covered.