Breaking CD and its penalties

[uhuh]

Hi,

I was at a local branch recently. The banker specialist has a proposal and I have questions about this.

Here is the proposal.

Open a 5 years CD at 2.25 % which is far better rate than Money Market account which gives 0.45 %. After 1.5 years, I should break the CD if the rates do improve. I only would have to pay 6 months penalties.

I know we have to report the interest earned on our tax returns. But from what she was telling me that I can use the penalties to offset other interest that I earn. This way I can earn 4 times the amount of interest in one year.

Here are my questions:
1) Will the penalties that I have to pay in order to break be recognized as income earned?
2) Can I offset penalties against other interest earned? If so, how?
3) If this is a valid proposal, then I'm shocked that no one has discussed this on MSN Money Board or here.

Please share your opinions.

thanks

[commentator]

Penalties for early surrender of a certificate of deposit are deductible on the front of Form 1040 at the bottom. The line is well labeled.

[mwcpa]

the penalty related to an early withdrawal from a CD, as noted by commentator, is deductible on the face of form 1040 on a clearly noted line.

in regards to this being a viable investment strategy that would be a personal decision, I am sure some of the investment "gurus" would have comments about such...