Welcome back to The Weekly Wealth Boost. Last week we covered tax considerations for your different investment accounts. This week we try to help you think through allocating between investments that yield passive income and offer appreciation.
What you need to know 🧠
Earning interest is actually sexy again. With some high yield savings accounts paying over 5% in interest annually, of course it is. By contrast, the S&P 500 annual dividend yield is a measly 1.6%. $10,000 invested in a savings account will earn you $340 more in passive income over a year. While parking assets in cash can seem like a great move, beware of hidden taxes and opportunity costs.
All yield is not equal
Opportunity cost:
Sure, high-yield savings accounts offer nearly guaranteed returns while the high rates last. But for long-term goals, it may be more strategic to stick to the stock market. For example, the S&P 500 has averaged annual returns of 9.9% over the past 30 years. It's more volatile, but market growth could mean better before and after-tax returns than interest earnings.
Tax differences:
- Interest income: Income from savings accounts is taxed at the same rate you pay on your salary. This rate can range from 10% up to 37% based on your tax bracket.
- Short-term capital gains: Just like interest, profits from assets sold within a year of purchase are also taxed as ordinary income.
- Long-term capital gains: If you've held an asset for more than a year before selling, your tax could be 0%, 15%, or 20%.
- Qualified dividends: Most dividends fit this category. They face the same rate as long-term capital gains, as long as you hold the stock for 60 days.
- Non-qualified dividends: Just like interest, these are taxed at regular income rates, which can range from 10% to 37%. These dividends are paid by certain investments like real estate investment trusts and master limited partnerships, as well as stocks not held long enough.
We’ll dive into the details of qualified vs. non-qualified dividends in a future post.
Accounts matter:
Different accounts have different tax implications. The debate between interest, dividends, and capital gains mainly matters in taxable brokerage accounts. In tax-advantaged or non-taxable ones, it's more about how much risk you want to take on and what returns you are seeking.
How Mezzi streamlines it all:
Optimizing all of those decisions can get complicated quickly. Mezzi helps in a few important ways:
- Making sense of your allocations across accounts
- Understanding your income vs. capital gains
- Insights to optimize your taxes across accounts and assets
If you’re currently a user, stay tuned for our new AI-powered tax loss harvesting insights.
