How do you make money on interest accounts?
They had a thing about it on the news. They said if you have a small amount of money such as five hundred dollars you can put it in an interest account and you can make money over the next couple of years. Is this true? Do they work? Is there a flaw of some kind?
Interest bearing accounts pay a percentage of the amount on deposit. If you put $500 in an interest bearing account that pays 3% APR, it will earn $15 in a year. The $15 is taxable; i.e., you will owe taxes on it because it is income. The tax percentage is based on your level of annual income. You do not (as stated by someone else) pay taxes on the total money on deposit, though you are required to pay income taxes on the money when originally earned. The interest you receive is additional, taxable income.
As to the question of "do they work" it depends on what’s meant. Yes, they return interest as agreed (assuming a legitimate investment account), but an interest bearing account is unlikely to keep up with what’s offset by taxes + inflation.
For example, if you put $1000 in an interest bearing account that pays 3%, you will have $1,030 a year later. You owe taxes on the $30 of, let’s say, 20% (depends on total income), so that’s $6.00 and it leaves you with $1,024. You are twenty-four bucks ahead — but hold the phone.
Now let’s say the the price of the items you tend to purchase — food, clothes, gas for the car, etc. — went up 2.5%. What used to cost you $1,000 last year now costs $1,025 — and your $1,000 in the interest bearing account is only $1,024 after taxes, so you can’t buy as much now as you could with the original amount. While it worked in the sense it paid you interest to keep the money on deposit and you have a higher balance than what you started with, the deposit amount actually shrank in purchasing power.