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Inheriting CD can add to taxes

By Sheyna Steiner ·
Wednesday, September 14, 2011
Posted: 10 am ET

Inheriting a CD can cost you money. Though an inheritance is not generally subject to federal income tax, the interest earned on an inherited CD is. To avoid that, you can close the account and withdraw the funds but the bank may charge an early withdrawal penalty in that case.

The Web site for the Kansas City Star,, ran a column on Monday penned by Claudia Buck in which a reader asked about the interest earned on an inherited CD.

Here's what Buck had to say about inheriting a CD in "Ask the experts: Is inherited CD's interest taxable?"

A certificate of deposit is not taxable to the beneficiary, under the general rule that an inheritance is not subject to federal income tax.

However, the earnings on an inheritance are taxable. The bank will send a 1099-INT when taxable interest paid on an account is at least $10 during the year.

The CD the writer inherited was what is known as a payable-on-death CD, the subject of a recent Dr. Don column on Bankrate.

A payable-on-death, or POD, account allows you to name beneficiaries for the certificate of deposit. POD CDs are often used to avoid probate because the assets transfer when the account owner dies. Savings bonds and some other assets also can have POD beneficiaries.

Unless you want to pay the early withdrawal penalty, you may be stuck with the extra interest income from the inherited CD. Dr. Don reports that banks may use their own discretion in regard to waiving early withdrawal penalties upon the death of a CD account owner.

Have you inherited a CD or had any problems closing an inherited CD account?

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NO stocks 4 me
September 14, 2011 at 9:40 pm

Yeah that's whom I mean, so there isn't any tax when it transfers to the spouse anyway, another individual will be hit though.

I know I'm not getting the compounding by doing it that way, but my reasoning is

1 I still get the mny mkt rate,(again not much)

2 I use the money to pay estimated tax instead of my other monies while I'd have to wait 3 to 5 years for the CD to mature to get the money. For now I only go 12 to 24 month time frames, who knows the little Gen "Bernakapart" may just fly the white flag, smirks.

So with the other point about tax, I assume 3 would be just to only transfer the principle amount in that case.

I remember the 70's, when rates were 14 or 15%, when I didn't have any money as a young soldier, lol, I also remember them at 9 to 10% in the 80's, that's when I started to save big time, and just a small CD at those rates added up, I always went long with as much as I could. Its worked for me, I never had a 401 or anything like that, or any IRA's or stock, but I'm OK, not rich but can eat. I took SS at 62, my military retirement and my CD's, which may not be getting much now, but anything is always better than 0. Like I said to one guy, would you throw 100 or 200 bucks a month in the trash cause rates are low?

This time will pass , maybe take a bit longer this time, but it will. For now I just turn back to my old saver mode, just save what I can, and live within my usual monthly income. I do without cell phones, LCD TV's and high speed ISP, I still use cheap ol dial up.

I never messed with any of those financial wizards either, probably what saved me, smirks.

Sheyna Steiner
September 14, 2011 at 2:25 pm

Thanks for commenting.
I assume you mean it's your spouse that you designate as the beneficiary on your account but yes it would have to be quite a large sum of money before the taxes added up substantially in this rate environment. Silver lining?

NO stocks 4 me
September 14, 2011 at 2:19 pm

I always have the interest going back to a money market account on a monthly basis.

Besides its the spouse that's the POD, not some other individual or other family member.

Also with rates this insanely low the amount taxable wouldn't make a hill of beans as it is.