When Do You Pay Taxes? A Guide to Tax Rules for Different Account Types & Benefits

As Benjamin Franklin famously penned, “In this world nothing can be said to be certain, except death and taxes.” While taxes are certain, most people don’t really know what to expect. Our American financial system has so many different kinds of accounts, with different kinds of taxation, that it can be hard to keep them all straight. Here are the most common types of accounts and benefits available and how they are taxed. 

Types of Taxes

There are two main types of taxes that we will address here. The first is ordinary income tax, which is how earned income is taxed with the brackets that people are most familiar with: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The second is capital gains tax, which has rates of 0%, 15%, and 20%. For high income earners (in 2026, singles earning over $200,000 and married couples earning over $250,000), there is an additional 3.8% net investment income tax (NIIT) that may apply to certain investment income, including capital gains, interest, and dividends.

The tax rules discussed here apply to federal taxes. Some states have different rules, so it is important to understand the tax implications of each account in your own particular state.  

General Accounts

Bank Accounts

With traditional bank accounts, such as checking and savings, the money that you put into the account has already been taxed. Because of that, only the growth in the account, the interest paid, is taxable. Interest from checking and savings accounts is taxed as ordinary income. 

Investment Accounts (Non-Retirement)

Investment accounts that are not specifically for retirement can be called many things: brokerage accounts, taxable accounts, joint accounts, individual accounts, trust accounts, etc. They can be invested in a variety of things, such as individual stocks and bonds, mutual funds, ETFs, and cryptocurrencies. Their defining characteristics are that they are investment accounts (not deposit accounts like bank accounts) and not designated for something specific, like retirement or college. 

Like with bank accounts, the money that you put into these accounts has already been taxed and will not be taxed again. Only the growth in the accounts and dividends, interest, and capital gains paid from the investments within the account are taxable. The growth is taxed as ordinary income if the investment has been held for less than a year and as capital gain if the investment has been held for over a year. Dividends are taxed as capital gains if they are qualified, otherwise they are taxed as ordinary income. 

Real Estate

Real estate is subject to local property taxes on an annual basis and capital gains taxes when sold. When you sell a property for more than you paid for it (plus improvements), you are taxed on the profit. Investment properties follow the same rules as investment accounts, where properties held for over a year are taxed at capital gains rates and those held under a year are taxed as ordinary income.

For your primary residence, you are allowed to exclude up to $250,000 (single taxpayer) or $500,000 (married taxpayers) of capital gains before you have to pay taxes. That means for a married couple, your house has to sell for more than $500,000 more than you bought it for before you have to pay any taxes. 

Retirement Accounts

Traditional Retirement Accounts

Traditional retirement accounts are also called pre-tax because you don’t have to pay any taxes on the funds before you put them into the account. These accounts can be 401(k)s, 403(b)s, 457(b)s, TSPs, IRAs, SEP IRAs, SIMPLE IRAs, etc. They are tax-deferred accounts, so you don’t have to pay any taxes until you take the funds out of the account. However, because you haven’t paid taxes on any of the money in the account yet, all withdrawals are taxed at ordinary income rates. 

Roth Retirement Accounts

Roth accounts function the opposite of their pre-tax counterparts. You pay taxes on the funds before you put them into the account, but then all qualified withdrawals are completely tax-free. Even the investment growth in the account can be withdrawn tax-free. Employer contributions have traditionally been made on a pre-tax basis, although some employer plans now allow certain matching or nonelective contributions to be made as Roth contributions.

Minor & Educational Accounts

College Savings Accounts (529 Plans & Educational Savings Accounts)

College-specific investment accounts are taxed much like Roth retirement accounts when used for qualified expenses. You put money in after paying taxes on it and withdrawals are completely tax-free when used for qualified educational expenses. If you withdraw the money for non-qualified expenses, then you have to pay ordinary income taxes on any earnings and also a 10% penalty. 

UTMA/UGMA

UTMA and UGMA accounts are funded with after-tax dollars. Interest, dividends, and capital gains generated by the account are taxed according to “Kiddie Tax” rules. In 2026, the first $1,350 is tax-free, covered by the child’s standard deduction. The next $1,350 is taxed at the child’s marginal tax rate. Amounts over $2,700 are taxed at the parents’ marginal tax rate. These dollar thresholds are updated by the IRS regularly. 

Trump Account

Trump Accounts generally receive tax-deferred growth. The taxation of withdrawals depends in part on the source of the contributions, with some amounts representing after-tax basis and other amounts taxable when distributed. Early distributions may also be subject to an additional 10% tax.

Health Accounts

Health Savings Accounts

Health savings accounts are only available to people with qualifying high-deductible health insurance. They combine the benefits of both traditional and Roth retirement accounts. Contributions are made pre-tax and withdrawals are tax-free when used for qualified health expenses. Non-qualified withdrawals before age 65 are subject to both ordinary income tax and a 20% penalty. Non-qualified withdrawals after age 65 are treated as pre-tax retirement accounts; taxed as ordinary income and penalty-free.

Flexible Spending Accounts

Flexible spending accounts (FSAs) are employer-provided benefits for healthcare expenses or childcare expenses. They are funded with pre-tax paycheck deductions. Withdrawals for eligible expenses are tax-free. Most excess FSA funds must be forfeited at the end of the calendar year, which can be more expensive than paying taxes. 

Benefits & Annuities

Social Security

While not technically a kind of account, Social Security is a major source of retirement income and does have tax consequences. Up to 85% of Social Security benefits (both retirement and disability) are taxable, depending on your income. They are taxed at ordinary income tax rates.

Unemployment Benefits

Unemployment benefits are treated as ordinary income and fully taxable at the federal level. They are tax-free in some, but not all, states.

Disability Benefits

Benefits paid from disability insurance policies are taxed based on how the premiums were paid. If premiums were paid with pre-tax dollars, which is most common for employer-provided coverage, then benefits are taxable as ordinary income. If benefits were paid with after-tax premiums, then the benefits are paid out tax-free. 

Annuities

Annuities are not a type of account, rather a type of investment. Their taxation depends on the type of account they are in. If they are pre-tax, within a traditional retirement account, then the full payment is taxed as ordinary income. Non-qualified annuities that were funded with after-tax money are partially taxable. Annuitized payments are taxed based on what percent of the account is contributions versus earnings. Lump-sum or partial withdrawals are taxed as if earnings are taken out first, which are taxed at ordinary income rates, and once the earnings are depleted withdrawals are tax-free returns of principal. Money withdrawn from either type of annuity before age 59 ½ is subject to a 10% penalty. 

At Guide Financial Planning, we are not CPAs or accountants and do not provide tax advice. However, we do tax planning and take taxes into consideration with all of our financial planning. If you want to learn more about the services we offer, schedule a free introductory phone call with us.

About Guide Financial Planning

Guide Financial Planning is led by founder Ben Wacek, who is a Christian fee-only Certified Financial Planner® and Certified Kingdom Advisor®. He has a passion for helping people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.