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Our Story: Both my wife and I are 27 years old and have gone through financial hell and back. Now we are on track to financial freedom, however we are not financial advisors or professionals, just everyday people. Share our journey from a negative networth and email us if you have questions or comments! :)



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Sunday, November 27, 2005

Interest-ing!

Does the government tax savings interest?

Heres my thought of the day... The ultimate goal for myself and family is to have approximately $4 MIL net for the simple reason that we can live off the interest (here for example 4%- an industry standard and could be alot higher) of $160,000/ year or ~$13,300/ month. That would be fairly substantial in a retirement age. If it falls short, and we only are able to obtain half, ie. $80,000/year (6,600/mo) it still would be livable. However is this interest taxed??? We all know that Roth IRAs are tax-free so the government doesnt get a cent of it, but what about a regular savings account. Is that taxable? I went to the IRS website to find out as well as a tax advisor for the answer.

Yes, the monies obtained through interest whether savings, mutual funds, stocks, is taxed at the regular income percentage that the interest is earned. For example, in our above scenerio, $160,000 gained every year will be taxed as if you earned that income and you will have to pay Uncle Sam in that tax bracket. However throughout the year, you can use several tax shelters, discussed in a later table, to help you keep as much as you can.

Here is a link to check the IRS 2005 tax bracket (this is an Adobe PDF file) :
http://www.irs.gov/pub/irs-pdf/i1040tt.pdf

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