- Banks can pay interest on a CD either into a separate account you designate or into the CD itself. If you use the CD as an investment that you do not need to tap into until maturity, having the interest added into the CD each time the bank compounds the interest can help increase your return by the time the CD matures. However, if you need the interest as it is paid, make sure you get a CD that allows you to have the interest paid out rather than added to the account.
- CDs impose stiff financial penalties for taking money out of the account before the date of maturity, so be sure that you will not need the the principal sum you invested until after the CD has matured. According to Bankrate, CDs expected to mature in more than one year often impose a penalty of 180 days worth of interest on money taken out early. CDs with maturity dates of between one month and a year charge about 90 days worth of interest.
- The Internal Revenue Service requires you to report CD interest in the year that it accrues, even if you decide not to have the interest paid out to you. For example, if your CD compounds the interest into the account and you cannot remove it without paying an early withdrawal penalty, you will still owe income taxes on that interest.
- At the end of each year, your lender will send you a Form 1099-INT. Listed in Box 1 of the form will be any interest you earned for that tax year. This amount must be reported as taxable income. If you have $1,500 or more in total interest for the year, including interest earned on your CDs, you must file your taxes with Form 1040 and complete Schedule B, which documents each source of interest income for the year.
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