How much income tax do savings cost?

Summer Productivity: How much income tax do savings cost?
I’ve heard that you only have to pay income tax on savings accounts if you take out money. Is that true? If you do take out money how much do you have to pay. What if you took out money to pay for classes, will you have to pay less income tax; how much less? What other things can you buy that will cost you less or no income tax? Can you give me an example?

Answers and Views:

Answer by v b
What kind of savings account?

If this is a regular account at the bank, you pay tax on the interest income each year but nothing when you take the money out.

If it’s a brokerage account invested in mutual funds, then there can be capital gains when the mutual funds are sold (and you have to sell them to get the money out). The tax is only on the GAIN, not the entire amount. Commonly called UGMA and UTMA accounts.

If this is a tax deferred savings account (529 plan or coverdell ESA), then you don’t pay taxes each year, but then look at what the money is spent on when it’s withdrawn. If it’s used for qualified educational expenses, it’s tax exempt. If not, tax + 10% penalty.

Answer by gorgon medici TR
You are missing something. Any regular savings account that is funded with AFTER tax dollars incurs no additional tax liability when you make a withdrawal. Interest earned on the account may be taxable.

Any savings account funded with BEFORE tax dollars, such as a traditional IRA, will incur tax liability if you make a premature withdrawal, along with other fees and penalties.