When you think of CDs, you probably think of those spinning
little musical discs. However, there’s another kind of CD that’s big in the
financial world. These CDs or certificates of deposit are a form of investment,
and they’re incredibly safe. They’re protected by FDIC insurance or NCUSIF
insurance. However, like most financial things, they are subject to various
types of taxation.
Interest Earnings
Taxation
Unfortunately, when it comes to taxable accounts, you will
have to pay taxes on any interest you earn from your CD. That interest
qualifies as a special type of income known as “interest income.” That means
that you have to report the funds when you file your taxes, and they will be
taxed accordingly.
If you earn over $10 in interest from your CD, the IRS will
send you a form 1099-INT where you will report the income. If you make less
than that amount, you can report it yourself.
Retirement Accounts
The taxation rules are a little bit different when it comes
to retirement accounts.
With traditional pretax accounts, you will not have to pay
income tax on your interest right away. Usually, you’ll only pay taxes when you
take funds out of the account for your own use.
Roth accounts are in their own category and often don’t
require you to pay any interest-related taxes. However, you should always check
with a tax professional to ensure you’re paying all of the taxes you owe and
not accidentally missing out on any.
As you can see, the taxation rules regarding CDs are fairly
straightforward. If you’re ever in doubt, though, just ask your financial
adviser or even your financial institution for clarification. That way, you can
enjoy the full benefits of a CD and not make any missteps along the way.