Many savings accounts pay interest. Bonds and other fixed income investments do too.
POINTS TO KNOW
- Interest is taxed at your usual income tax rate.
- "Interest dividends" from funds are taxed like regular interest.
Even if you're new to investing, you're probably familiar with interest income. It's paid by many bank products like savings accounts and CDs (certificates of deposit). It's also paid by bonds and money market products.
If you own bonds or money markets through a mutual fund or ETF (exchange-traded fund), the interest payments will go to the fund and will then be passed on to you as "interest dividends" (which are treated as interest for tax purposes).
Some bonds issued by government entities have special tax treatment.
What's the tax rate on interest?
Interest income is taxed at your usual income tax rate.
How is interest reported?
Interest on individual securities is reported to you and to the IRS on Form 1099-INT. Interest paid by funds is reported on Form 1099-DIV.
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How investments are taxed
Income you can receive by investing in bonds or cash investments. The investment's interest rate is specified when it's issued.
An insured, interest-bearing deposit that requires the depositor to keep the money invested for a specific period of time or face penalties. Brokered CDs can be traded on the secondary market.
A bond represents a loan made to a corporation or government in exchange for regular interest payments. The bond issuer agrees to pay back the loan by a specific date. Bonds can be traded on the secondary market.
A type of investment that pools shareholder money and invests it in a variety of securities. Each investor owns shares of the fund and can buy or sell these shares at any time. Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed.
A type of investment with characteristics of both mutual funds and individual stocks. ETFs are professionally managed and typically diversified, like mutual funds, but they can be bought and sold at any point during the trading day using straightforward or sophisticated strategies.