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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121588  
Subject: Re: Taxes on CD interest Date: 1/31/2000 8:40 PM
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TMF Taxes wrote,

<<<<<Edmunds writes "The interest on both standard CDs and brokered CDs is not paid until the CD matures. For tax purposes, there is no tax liability until interest is paid. Thus you can defer taxes on the interest for the length of the CD plus the number of months until your estimated tax payments or final tax payments are due.">>

Right...

<<Am I missing something here? If you have a 5 year CD, don't you get a 1099 each year for the interest earned on the CD, even if you reinvest it?>>

The term "reinvest" really means that you are earning interest and "rolling over" the CD. But the statement above is correct...if you DO REALLY have a CD that will not mature until five years has passed (I don't know why anybody would want such a thing...but it takes all kinds), then you wouldn't report any of the interest until it was paid to you or credited to your account...at the end of the five year term.

<< Does Uncle Sam really let you slide and pay taxes on 5 year's worth of interest when the CD matures?>>

Sure...because you can't TOUCH the interest or the balance in the account until that five year period is over...without risking substantial early withdrawal penalties.

It's true. It's legal.



Roy,

Thank you for the reply.

If I found a bank willing to sell me a 5 year CD that paid all the interest at maturity, why does the tax treatment for this instrument differ from a zero-coupon corporate bond. I thought that you paid taxes on "imputed interest" each year if you hold a 5-year zero-coupon corporate bond in a taxable account. Am I mistaken?

intercst
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