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While not always the case, the majority of investment income is subject to a level of taxation once the funds are withdrawn.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.

RELATED TERMS
  1. Income

    Income is money that an individual or business receives on a ...
  2. Net Income - NI

    A company's total earnings (or profit). Net income is calculated ...
  3. Net Investment Income (NII)

    Net investment income is income received from investment assets ...
  4. Equity Income

    Equity income is primarily referred to as income from stock dividends. ...
  5. Investment Income Ratio

    Investment income ratio is the ratio of an insurance company’s ...
  6. Current Income

    Current income is associated with strategies that seek to identify ...
Related Articles
  1. Managing Wealth

    How Will Your Investment Make Money?

    Discover the basic types of investment income and which asset classes pay them.
  2. Investing

    Understanding the Income Statement

    The best way to analyze a company - and figure out if it's worth investing in - is to know how to dissect its income statement. Here's how to do it.
  3. Financial Advisor

    Income tax on mutual funds: The basics

    Learn about the basics of income tax on mutual funds, including what types of income may be subject to the capital gains tax rate.
  4. Personal Finance

    Good News! Americans Are Earning More

    After years in the doldrums, incomes are up – and not just for the 1%. Here's who's benefiting.
  5. Taxes

    5 Tax-Efficient Portfolio Tips for High Income Earners

    High income earners can use these tips to make their portfolio more tax-efficient.
  6. Financial Advisor

    3 Ways Retirees Can Generate Income from Investments

    It's not enough to have savings; those investments have to generate income to last through retirement. Here's how.
  7. Taxes

    Comparing Long-Term vs. Short-Term Capital Gains Tax Rates

    Learn about the difference between short- and long-term capital gains and how the duration of your investment can impact your tax liability.
  8. Investing

    Understanding Taxes on Mutual Funds Dividends

    Learn about the basics of mutual fund dividend taxation, including how and why mutual funds pay dividends and when different tax rates apply to dividend income.
Hot Definitions
  1. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  2. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  3. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  4. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  5. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  6. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
Trading Center