What is 'Investment Income'
Investment income comes from interest payments, dividends, capital gains collected upon the sale of a security or other assets, and any other profit made through an investment vehicle of any kind. Generally, most people earn a large portion of their total net income through employment income. However, disciplined saving and investment in the financial markets can grow moderate savings into large investment portfolios, yielding an investor a large annual investment income.
BREAKING DOWN 'Investment Income'In income statements of publicly traded companies, an item called investment income, or losses, is commonly listed. This is where the company reports the portion of the net income obtained through investments made with surplus cash as opposed to being earned with the company's usual line of business.
Investment income refers solely to the financial gains above the original cost of the investment. The form the income takes, such as interest or dividend payments, is irrelevant to it being considered investment income as long as the income is generated due to a previous investment. Additionally, investment income can be received as a lump sum or regular interest payments.
Investment Income Made Simple
In the simplest form, the interest accrued on a basic savings account is considered income. The interest is generated as an amount above and beyond the original investments, which are the deposits placed into the account, making it a source of income.
Options, stocks and bonds can also generate investment income. Whether this is through regular interest payments or selling a security at a higher rate than it was purchased, the funds above the original cost of the investment qualify as investment income.
Understanding Investment Properties
Some investors choose to purchase real estate as a way to generate investment income. Most commonly, this is accomplished through receipt of rent payments from an authorized tenant. Once the original cost of the property is repaid by the investor, and rent payments received are not used for the purpose of covering other property-related expenses, the income qualifies as investment income.
Investment Income and Taxes
While not always the case, the majority of investment income is subject to a level of taxation once the funds are withdrawn. The associated tax rate is based on the form of investment producing the income and other aspects of an individual taxpayer’s situation. Many retirement accounts, such as a 401(k) or traditional IRA, are subject to taxation once the funds are withdrawn. Certain tax-favorable investments, such as a Roth IRA, are not taxed on eligible gains associated with a qualified distribution.