- Likewise, when the CDs that inheritors receive mature, the inheritors will owe taxes on all the interest that has accumulated, and that interest will be taxed at ordinary income tax rates not as capital gains.
And you typically don't have to pay taxes on your earnings until you make withdrawals in retirement. To defer taxes on CD interest until retirement, you can open a CD within a tax-deferred retirement account — whether it's an employer-sponsored plan or an IRA.
Generally, beneficiaries do not pay income tax on money or property that they inherit, but there are exceptions for retirement accounts, life insurance proceeds, and savings bond interest. Money inherited from a 401(k), 403(b), or IRA is taxable if that money was tax deductible when it was contributed.
That means if your initial beneficiary passes away before they can claim the CD funds, your contingent beneficiary could claim them. Also, "some designations can be changed, but others might be irrevocable, meaning they can't be changed," says Stivers.
Generally, banks can handle CDs belonging to a deceased account owner in two ways: Close the CD and pay out the balance to the beneficiary, or transfer or convert ownership of the CD to the beneficiary.
Bank Accounts Held Solely in the Decedent's Name
This means checking accounts, savings accounts, and certificates of deposit (CDs) that are solely in the name of the deceased will need to be probated. However, accounts with designated beneficiaries or those held in joint tenancy may bypass probate.
Many people worry about the estate tax affecting the inheritance they pass along to their children, but it's not a reality most people will face. In 2025, the first $13,990,000 of an estate is exempt from federal estate taxes, up from $13,610,000 in 2024. Estate taxes are based on the size of the estate.
The best way to avoid the inheritance tax is to manage assets before death. To eliminate or limit the amount of inheritance tax beneficiaries might have to pay, consider: Giving away some of your assets to potential beneficiaries before death. Each year, you can gift a certain amount to each person tax-free.
There is no federal tax for beneficiaries of POD accounts. There will be an inheritance tax, or death tax, depending on the state, that will need to be settled before any money can leave the account. If the deceased has any debt that has not been settled, the money in the account must go to paying that off first.
One major drawback of a CD is that account holders can't easily access their money if an unanticipated need arises. They typically have to pay a penalty for early withdrawals, which can eat up interest and can even result in the loss of principal.
If you purchase a short-term CD that matures the same year it was purchased and earn $10 or more, you'll have to pay taxes on it for that year. If the term of such a CD spans over two calendar years, you'll need to pay taxes on the interest earned on two consecutive tax returns.
According to new CD beneficiary rules, the interest earned on a certificate of deposit beneficiary account after the original owner's death is subject to federal income tax. In 2024, federal income tax rates range from 10% to 37%, depending on your taxable income.
Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.
The IRS treats interest you earn on a CD as income, whether you receive the money in cash or reinvest it in a new CD. The interest is taxable, the IRS says, in the year it is paid.
If you received a gift or inheritance, do not include it in your income. However, if the gift or inheritance later produces income, you will need to pay tax on that income. Example: You inherit and deposit cash that earns interest income. Include only the interest earned in your gross income, not the inherited cash.
Beneficiaries of an inheritance in California typically do not have to pay income taxes on the inherited assets. That is because inherited assets are generally not taxable income for individual beneficiaries.
Answer: Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them. However, any interest you receive is taxable and you should report it as interest received.
Another key difference: While there is no federal inheritance tax, there is a federal estate tax. The federal estate tax generally applies to assets over $13.61 million in 2024 and $13.99 million in 2025, and the federal estate tax rate ranges from 18% to 40%.
Immediately after receiving an inheritance, you should notify your local Social Security office.
Strategies to transfer wealth without a heavy tax burden include creating an irrevocable trust, engaging in annual gifting, forming a family limited partnership, or forming a generation-skipping transfer trust.
CDs are commonly taxed the year the interest income is earned and not at maturity, however, an inherited CD and its income accrued before the holder's death are not taxable for the recipient. The only part that's taxable is the interest income from the date of death.
While the principal amount of the CD transfers without income tax issues, any interest earned after death and before transfer will be treated as ordinary income on the tax return of the person who inherits it.
First and foremost, there are a number of asset types that typically do not pass through probate. This includes life insurance policies, bank accounts, and investment or retirement accounts that require you to name a beneficiary.