Ask the Expert: Tax consequences of a maturing CD
August 12, 2010
Q: When my CD matures, can I put it into a savings account without having to pay taxes on it?
A: The answer is yes and no. The maturation of a CD is not, in and of itself, a taxable event which would trigger the payment of taxes. However, this is only because your bank should have been including income on the CD in each year's 1099 form. In short, if you've been declaring income from that form on your taxes, then you would have been paying the taxes on the CD interest year by year, as it was earned.
The one caveat is that if the CD was part of an IRA or other tax-deferred retirement plan, you will want to make sure the proceeds roll into an account which the bank has also set up as tax-deferred plan. Otherwise, the maturity of your CD could not only trigger a taxable event, but perhaps even a tax penalty if you are younger than retirement age.
Back to your question: with tax considerations out of the way, you can decide where to put the proceeds of the CD based on what kind of bank rate you can get. Assuming you have no short-term needs for the money, compare the best CD rates with rates on savings accounts--and don't forget to include money market rates in the comparison. Money market rates are generally higher than savings account rates, and competitive with short-term CD rates, without requiring that you lock up your money for a specified period of time.
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