Investment Certificate - Tax-deferred Certificates

Tax-deferred Certificates

Some investment certificates are tax-deferred. The investor deposits a single lump sum of money into the certificate to earn a guaranteed interest rate. Most tax-deferred certificates do not allow add-on payments or partial withdrawals. The interest earned in such certificates grow tax-deferred, much like an Individual Retirement Account (IRA). All certificates must have a maturity date, typically 20 to 30 years from the time of deposit; the maturity date is the point at which the certificate can no longer renew and must be cashed in. With tax-deferred certificates this means at the point of surrender all interest earned in the account is reportable and taxable in that year. Many investors will hold onto tax-deferred certificates for the full length of time and the interest earned can be quite substantial. At the time of surrender, the interest earned would create a large tax liability to the investor. To help with this, many companies offer what is referred to as options. Some option' allow the investor to take only a portion of the account out per year to help spread the tax liability through several tax seasons.