CD or Savings Account Question

[ChemEng]

This is a dumb question, but I cant find a clear answer. Searching the boards (again) yielded nothing.

Is there any reason to invest in a CD if the APY of my savings account is greater than the APY of the CD? Im guessing the incentive would be in different tax treatment between the 2, but I couldnt find a comparison to evaluate (if its even the case).

Anyone want to help a Dryer sheet aficionado out here?

 

[OAG]

No difference interest on CD and taxable savings accounts are treated the same. It even goes in the same block on your tax return. No advantage unless you want the lock in the return long term with a CD versus a savings account on which the interest rate "floats".

 

[tightasadrum]

ChemEng,

If I understand what you're asking, it differs like this:

CD is more restrictive. You have to commit your money for a period of time. 6mths,1 year, 3 years, 5 years etc. Savings accounts have freer access to the money, but the rate could change on you so that you're earning less money than a CD would.

The tax rate should be identical, they are both unearned income, taxed at your marginal tax rate. Hope this helps...I think I'm right, but if I'm not, you'll know soon enough on this board.

 

[DJRR]

Is there any reason to invest in a CD if the APY of my savings account is greater than the APY of the CD? Im guessing the incentive would be in different tax treatment between the 2, but I couldnt find a comparison to evaluate (if its even the case).

The only difference is locking in the term vs. the floating savings account. For ex. today you can buy a 5 yr CD at ~ 5% and a MM ~ 5.125%. However if the Fed keeps cutting interest rates your MM might be 4% next year and a few years ago was 1%. If you had locked in at 5% you would be very happy. If rates rise you would lose, but you always have the option to break the CD pay the penalty and reinvest if your net would be higher. The interest treatment is the same for taxes.

 

[FinanceDude]

It's a bet as to whether the Fed raises rates or not in 2008. Why not ladder the CDs to protect against that happening??