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?
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(529 plan or coverdell ESA), then you don't pay taxes each year, but then look at what the money is spent on when it's withdrawn.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.
