How Do CDs Work?

Certificates of Deposit (CDs) are a type of time-limited savings account that offer a fixed interest rate, typically higher than that of regular savings accounts. Available at most banks and credit unions, CDs are known as share certificates at credit unions.

When you open a CD, you agree to leave your money in the account for a predetermined period, known as the term. Common terms include:

• Three months
• Six months
• Nine months
• 12 months
• 18 months
• Three years
• Five years

CDs offer several benefits, including higher interest rates compared to regular savings accounts, low risk due to FDIC or NCUA insurance, and predictable returns. However, they also come with early withdrawal penalties if you access your funds before the term ends.

How Are CDs Taxed?

Interest earned on CDs is considered taxable income by the IRS. The interest is taxed at the same rate as your ordinary income. For instance, if you fall into the 22% tax bracket, 22% of your CD interest will go towards federal income taxes.

It’s important to note that interest and dividends are taxed differently from capital gains. While capital gains taxes are generally lower, CD interest is taxed as regular income.

How to Report CD Income on Your Tax Return

Your bank or credit union will issue a 1099-INT statement showing the interest earned on your CD for the year. You should include this interest on Line 2b of your Form 1040. If your CD matures within the same year it was opened, all interest will be reported for that year. For multiyear CDs, interest is reported annually.

How to Avoid Being Taxed on CD Earnings

One way to avoid taxes on CD earnings is by opening an IRA CD, a tax-advantaged account used for retirement savings. You can choose between traditional and Roth IRA CDs:

• Traditional IRA CD: Contributions are tax-deductible, but withdrawals are taxed as income.
• Roth IRA CD: Contributions are not tax-deductible, but earnings and withdrawals are tax-free.

Remember to roll your IRA CD into a new CD upon maturity to avoid early withdrawal penalties and taxes.

The Bottom Line

Paying taxes on your CD yield is straightforward. Ensure you look for your 1099-INT form in late January and include the interest information on your tax return. If you have concerns about tax liability on your savings and investments, consider consulting a financial or tax advisor.

Contact O1ne Mortgage for Your Mortgage Needs

At O1ne Mortgage, we are dedicated to helping you with all your mortgage service needs. Whether you’re looking to buy a new home, refinance your current mortgage, or explore other financial options, our team of experts is here to assist you. Call us today at 213-732-3074 to learn more about how we can help you achieve your financial goals.