Am I correct that interest must be paid at least annually on a Certificate of Deposit of one year or more? I have read through Reg DD thinking I would find an answer, but have been unsuccessful so far. Thanks for any help you can give me.!

If you don't pay interest at least annually, you turn the CD into an OID and have different IRS reporting requirements - specifically filing a 1099OID rather than a 1099INT.

Thanks for the confirmation, but now what is an OID?

The answer included above is correct, and in other words you do not have to pay interest at least annually, but a 1099OID must be issued based on the fact that tax is due on interest accrued - therefore, interest should be paid at least annually on certificates that have terms of more than one year. If the term of the certificate is only one year, no 1099OID is issued with a 1099INT issued in the year interest is actually paid. Go HERE to view IRS 550, Page 13 will be of interest.

Okay, just to clarify. If we would NOT pay interest at least annually on a CD, then it would no longer be a CD but instead an OID (original interest discount)?

It would still be a CD, but just subject to the IRS OID reporting rules for tax reportable interest.

And, of course, if you don't require that interest be paid or compounded at least annually, the APY on the account will be lower than the interest rate. When market rates are higher, this might make a difference to depositors who will want an explanation of this phenomenon. In today's rate environment, it's largely a non-issue.

Which brings me back to the original question. Let's understand that payment of interest on a CD can include payment to the CD itself a/k/a compounding or payment out (check or to another account, for example). Either of these on an annual or more frequent basis will avoid the OID issue and the depressed APY issue, too.

Thanks to both of you for your expert advice. I'm sure we would not want to pay interest at least annually, thus avoiding the OID issue.