Zero-Coupon CD Calculator
A zero-coupon CD is bought below face value and pays nothing until maturity — yet the IRS taxes the accrual every year regardless.
The tax bill lands before the money does
Buy a zero-coupon CD at $32,700 that matures at $50,000 in ten years and it accrues roughly $1,400 of interest in year one — taxable that year, at your ordinary rate, even though nothing reaches you until 2036. A 24%-bracket holder owes about $340 in April on income that exists only on paper. Multiply that across ten years and the phantom-income tax becomes a four-figure cash-flow commitment the discount price never mentions.
Which is why the standard advice is blunt: hold zeros inside an IRA, where accrual is not taxed annually, or have a specific reason not to.
Where zeros genuinely shine
For a known future bill they are the cleanest instrument in banking. A $50,000 tuition payment falling due in ten years, funded today at a known discount, carrying FDIC insurance and no reinvestment risk at all — there are no coupon payments to re-place at unknown future rates. Match the face value to the bill and the maturity to the due date, put it in the right account type, and it stops needing your attention.