CD investments are a great way to get your money to work for you. However, just like any other account and investment, the IRS is going to want their cut before you can enjoy your money. You can’t get away from it. But do you know how to pay the taxes on the interest you earn from your CD account?

When you earn interest on the money in your certificate of deposit, this is considered interest income and it is taxable for the year in which the interest is earned. The bank at which you have your CD account will typically send you a 1099-INT at the end of each year when you held the CD. It is up to you to fill it out and report the interest earnings to the IRS. The amount of taxes you will pay will reduce the amount that you get to keep once the CD matures.

In most cases, you will be required to pay taxes on the interest either when you receive the money in your hands or when you are able to take the money without paying large penalties. This means that if the bank sends you a 1099 after the first year of your CD and it doesn’t mature for a few more years, you can often defer the tax payments until full maturity. However, it is always best to speak with a certified tax advisor in these cases to avoid any penalties by the IRS. Individual circumstances differ so always seek professional advice in tax matters.

If you have ever invested in certificates of deposit at your bank or researched the various CD rates, you might wonder why the rates fluctuate during different times and even among different banks. Believe it or not, there are some factors that actually dictate the CD rates that are out there. Here are a few of those factors to help you better understand where the banks get the rates from.

CD Maturity
CD maturity refers to the length of time that you keep a CD account. CDs can range from 6 months to five years and possibly even longer. Typically, the longer your CD maturity, the more interest you will earn on the money in the account. For example, a 6-month CD may only pay 0.5 percent interest while a 5-year CD may earn 2 percent interest or more. However, if you take money out before the CD matures, you will pay a large penalty.

Current Interest Rates
The current interest rates and financial market will have a major impact on the CD rates you find at various banks. While the current market may help determine a baseline rate, some banks will offer a rate that is more or less depending on the individual bank’s volatility and the competition in the surrounding areas. When you see the feds raising interest rates, you can be sure that CD rates are sure to increase before long, too.

Enticing New Customers
When banks are trying to lure new customers to use their institution, you will usually find higher CD rates at those individual banks. Banks know that there are always customers shopping around for great rates and they will offer higher rates for introductory customers just to get your business.

Banks vs. Credit Unions
You will generally find that credit unions have higher rates than banks. This is because credit unions are non-profit institutions so they are in a position to offer their customers a little more interest for their money.

The best thing to do when looking for the best CD rates is to shop around at different banks in your area and online. You can find major fluctuations between various institutions so never just settle for using the bank you already have. With some extra research and homework on your part, your money will work much harder for you.

On July 1, Regulation E took effect for banks across the country. If you don’t know what Regulation E is, it is the new legislation that restricts banks from automatically enrolling their customers into standard overdraft plans. This means that if you charge more on your debit card than you have in your account, the bank will no longer cover the cost automatically and pass the charges on to you. Instead, the transaction simply won’t go through.

One of the benefits of the new legislation is that consumers will not be charged exorbitant overdraft charges automatically. If you want to continue to have this type of overdraft protection, however, you have to tell your bank that you still want it rather than just being in the protection plan automatically.

Analysts say this new regulation is bad news for consumers and banks alike. Banks are likely going to lose billions of dollars as a result of this new legislation because customers probably aren’t going to make the effort to enroll in the protection. Most consumers would probably prefer to have their transaction canceled rather than pay the $30 or $35 overdraft fee for each transaction. That could add up to hundreds of dollars in a matter of a day or two. This means that banks could lose about 15 percent of their annual income.

The banks are probably going to pass these losses onto the consumer. CD rates dropped by about 0.06 percent on average the day that the new legislation went into effect. Some are even saying that banks are going to lower their CD rates overall in order to make up for the lost revenue from these automatic overdraft charges. According to reports, CD rates have declined the most just since the beginning of July. Analysts expect banks to drop the CD rates by about 0.19 percent annually which should make up the $15 billion that the banks are expected to lose through the reform.

How do you feel about these new rules? Are you happy that you can have your debit card declined at the point of sale rather than pay the huge fee for a small overage? Do you invest in CDs or will the new reforms leave you unaffected overall?