[retiredguy123]

Originally Posted by Boomer

Part II: This is an additional question from me for this thread started a while back:

I am still buying short term, brokered CDs, along with a little bit of additional dividend stocks and some money market. (Yes. I know. I am a boring investor. Welcome to my snoozerama investment philosophy.)

Anyway……..I think I asked this additional question somewhere, someplace on TOTV in the past few months, but now I cannot find that thread……and I am just fine with saying I still don’t get it and asking again……..

So — can somebody please explain to me how interest on a brokered CD becomes taxable at the end of the calendar year in which it is bought, even though the interest income does not get paid until a lump sum at the very end, no compounding along the way.

So far, the CDs I am buying will pay off in 2023. But if I go longer term and all the interest is paid next year, why is that interest taxed before it actually appears in the account?

I am new to brokered CDs and, at first, thought I might have found a way to defer a little income or amount of the RMD until next year by going out longer term. But then I found out it does not work like that. I kept hoping I am wrong. Guess not. (sigh)

Here we are almost half way through 2023, so this question is back on my radar because very soon, 6 month+ CDs will throw interest into 2024 but that interest will still be taxable in 2023. Why?

(Well, I am obviously a woman who is quite secure in admitting that I know what I don’t know and not being the least bit embarrassed about asking questions. I cannot make this timing of taxable interest income thing make sense. Please, somebody explain it — or better yet, tell me where I am wrong in my understanding of how it works.)

Boomer

You pay tax on the interest earned every year, even if it doesn't show up on the statement. The reason is that you have access to the interest if you were to cash it in early, so it is earned income. Most banks will even allow you to withdraw the interest earned without penalty. Another reason is that the IRS says so.