Are Certificates of Deposit (CDs) Tax Exempt? (2024)

FAQs

Are Certificates of Deposit (CDs) Tax Exempt? ›

Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested.

Open your CD as part of a retirement account

With a traditional IRA, investments are made on a pre-tax basis. So, your income taxes will be deferred until you tap into your IRA in retirement. If you opt for a Roth IRA, your money grows tax-free.

CD interest is subject to ordinary income tax, like other money that you earn. The IRS requires investors to pay taxes on CD interest income. The bank or financial institution that holds the CD is required to send you a Form 1099-INT by January 31.

You must report interest earned on a CD as taxable interest on Form 1040. The bank issuing the CD will send you an annual information return, Form 1099-INT and/or Form 1099-OID, that reports the taxable interest income for the year in Box 1.

Treasuries are exempt from state income taxes, whereas CDs are subject to both federal and state income taxes.

Disadvantages of investing in CDs

As noted previously, since CDs have a set interest rate and maturity date, you typically can't withdraw the money from the CD without paying a penalty. The penalty ranges from a minimum of multiple months' worth of interest to more, depending on the bank and term of the CD.

Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

Are CDs as safe as Treasury bills? ›

CDs and Treasuries Offer a High Degree of Safety

Both CDs and Treasuries are considered extremely safe investments. Treasuries are backed directly by the federal government, while CDs are covered by FDIC insurance – which is also backed by the federal government.

A CD may allow you to earn more interest compared to a traditional savings account, depending on where you decide to open one. As long as you don't need the money in a CD before it matures, you could earn a decent amount of interest this way, especially when rates are climbing.

You can rollover your 401(k) account into a CD without any penalties or taxes. But you need to make sure you're rolling over into an IRA CD, specifically. And always ensure to roll over into a like-kind account, whether a traditional or Roth retirement account, or you might get hit with a surprise tax bill.

Regardless of how the yield is paid out to the investor—it usually goes into another account or is reinvested back into the CD—the money earned is considered taxable on both state and federal levels.

A tax-exempt security is an investment in which the income produced is free from federal, state, and/or local taxes. Most tax-exempt securities come in the form of municipal bonds, which represent obligations of a state, territory or municipality.

Tax-exempt interest refers to interest income that is not subject to taxation, most notably at the federal level. Some municipal bonds may also be "triple-exempt", where tax is not paid at the federal, state, nor local level.

The IRS treats interest you earn on a CD as income, whether you receive the money in cash or reinvest it in a new CD. The interest is taxable, the IRS says, in the year it is paid.

Contributions to a traditional IRA CD could potentially be deducted from your taxes. However, this is dependent on your income and whether you or your spouse, if applicable, are covered by an employer's retirement plan.