How will my CD earnings be taxed?

With the year winding down, the start of tax preparation season is just weeks away. That means employers, banks and investment firms will soon be sending you (and the IRS) forms indicating what you earned with them during the year.

If you owned any certificates of deposit in 2017, you’ll be included in these January mailings. That’s because CD earnings are considered “interest income”, making them taxable in the same way as interest earned from savings or money market accounts.

But some savers wonder when CD earnings become a taxable event. Does it matter if the interest compounds within the certificate versus being paid to a linked account? Does it depend on when you cash out the CD or when it matures?

The answer is generally no, none of those things will have an impact on your tax liability. Simply put, CD earnings become taxable when the bank or credit union applies the interest. Typically, that will mean four quarterly or twelve monthly interest payments throughout the year.

Each institution will then combine all of the interest payments into a lump sum for the calendar year, and will report this to you on a 1099-INT form. Whether the CD is still open or has matured will have no bearing on the tax obligations for that year.

One exception is CDs opened within an IRA account. Because the same rules apply to all IRA investments, interest earned on retirement CDs is not taxable until the funds are dispersed post-retirement.

Whether you own one certificate or a portfolio of dozens, the tax implications of CDs are straightforward, and unfazed by any attempt to strategize your timing. So invest your CD funds whenever it makes good sense for you, and let your bank help you do the simple tax math in January.