Most investors have heard of zero-coupon bonds, but did you know there are also zero-coupon CDs? 

Just as with the bond, you buy the CD at a deep discount to par value (the amount you'll get when the CD matures). 

The word "coupon" refers to an interest payment. Zero-coupon means no interest payments.

For example, if you buy a 10-year, $100,000 CD with a 7 percent interest rate for $50,000, you wouldn't receive any interest payments during the 10-year term. 

Instead, that money is being invested. 

The problem is you have phantom income each year. 

No money is being put in your pocket but you have to pay Uncle Sam because you owe tax on the interest. 

You'd owe tax the first year on $3,500 you haven't actually received. 

Each year you'll have a higher base than the year before  and a bigger tax bill.

Make sure you have the funds to cover the taxes.

Zero coupon CDs are investment options that do not pay interest to investors until the maturity date. 

The interest rates of these CDs are lower than that of traditional CDs, but investors purchase these CDs at below value prices. 

Investors are expected to pay taxes on these CDs even though they do not receive any actual payments on the investment until maturity. 

Zero Coupon CDs may have lower returns than other types of CDs.

Advantages of Zero Coupon Certificate of Deposit CDs

These CDs are purchased at deeply discounted prices.

The rates are locked in until the maturity date.

The investment pays out at a higher face value.

The original low rates may not reflect current interest rates.

Disadvantages of Zero Coupon Certificate of Deposit CD

Interest is paid at maturity for Zero coupon CDs.

Investors pay taxes on the investment.

Some Zero coupon CDs are callable.

They offer no steady income to investors.

If you are considering Retirement Planning, call for a free consultation today.