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CDs vs Treasuries vs municipal bonds
A 5 percent CD and a 5 percent Treasury are not equal for a New Yorker. Treasury interest is exempt from New York State and NYC tax. CD interest is fully taxable at federal, state, and city. For a top-bracket NYC client, the after-tax yield on a Treasury beats a CD at the same headline rate by roughly 0.7 to 0.8 percentage points.
Municipal bonds issued in New York can be triple tax-free – exempt from federal, state, and city. Worth comparing for clients in the 32 percent federal bracket and up. We run the equivalent-yield calculation as part of the high-net-worth planning conversation.
The 1099-INT timing trap
CD interest is reported on Form 1099-INT each year as it accrues – not when the CD matures. So a five-year CD where you don’t see a dollar of cash until year five still generates taxable income annually. Surprise tax bills are a common result. Exception: CDs with terms of one year or less are taxed when interest is credited or paid. IRS Publication 550.
Early-withdrawal penalties on CDs are deductible as an adjustment to income on Schedule 1, line 18. The penalty itself shows up in Box 2 of the 1099-INT. Easy to miss if you do your own return.
FDIC coverage
FDIC insurance covers $250,000 per depositor, per bank, per ownership category. For larger CD holders, splitting across multiple banks or using a CDARS (Certificate of Deposit Account Registry Service) account is the standard way to stay covered. We coordinate this for retired clients moving large amounts out of brokerage into safer instruments.
Idle cash question
If you have $250K+ sitting in checking, there are better tax-aware places for it. We run the comparison.