In this blog post I will help answer the question: Are Savings Accounts Tax Free? This is something that is good to know when saving money and how you go about reporting it on your taxes. If you find this post helpful then send this to a friend.
Side Note: This post is for the readers that don’t really know too much about any of this.
Do I Pay Taxes
If you have money in a savings account and are earning interest then yes that money is considered taxable by the IRS. If you have accumulated over $10 in interest from the savings account then your bank will send you a 1099-INT form for you to report the earned interest.
So if you are only making pennies in interest from the money saved then you won’t have to worry about any of that.
It should also be noted that whatever tax bracket you fall under, that is how much you are taxed for that interest (Example: 35% tax bracket means the interest will be taxed at 35%).
It also goes one step further. If you signed up for a new savings account and got a bonus, you will also have to report that on your taxes (the 1099-INT form).
This shouldn’t give you second thoughts about not opening up high yield savings accounts or investing long term. Whenever you are making money the IRS will want to make sure you are paying the taxes correctly.
How To Avoid This?
The only way that you are able to obtain interest tax free is through a Roth IRA. Opening these accounts allows you to put money (after taxes) into it and watch it compound a lot of interest long term. Once you are 59 and a half you will be able to enjoy that money tax free.
Of course you have to be making under $139,000 for singles and $206,000 for married couples to be able to contribute to a Roth.
If you were to invest $5,000 a year at 20yrs old, the rate of return was 7%, and retired at 65, you would have $1,549,761 in the Roth account. I hope you now see how powerful compound interest is compared to short term gains.
Watch this video below
Understanding the compound effect can change everything you do with your personal finances. Everyone has an opportunity to take advantage of what they think only rich people can do. Yeah you might have to take a slower route, but compound interest will still be in your favor.
Thanks for supporting The Finance Starter and I hope you are learning something from everything that I post (Because I am!). Make sure to share this with someone else that should learn if savings accounts are tax free.
read other post that I wrote below:
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- Creative Ways To Save Money In 2021
- 15 Simple Tips On How To Save Money
- Redditor Explains Why GME Will Squeeze
I want to also say that I am experimenting with WordAds on my website and will write a blog post about my earnings in a month from now. So stay tuned for that!