I’m good at saving, but terrible with finances.
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APY stands for Annual Percentage Yield, or the amount your savings account, CD or money market pays you. Savings account and money market account yields typically fluctuate with interest rates. So for the last 10+ years, up until about 2021, you never earned anything on your savings. Now that the Fed has raised interest rates (and recently said they are not going to lower them soon), you can earn 4-5+ % on cash. This is called Interest, not Dividends, which I’ll get to in a second.
Using the example above, let’s say your savings account or money market account earns 5% per year. That 5% interest you receive is taxed as ordinary income (ie just like your paycheck) both federal and state. So if you live in Georgia like I do, I pay federal and state taxes on the interest I earn from my 5%. If you live in a state with no state income tax, you obviously only pay federal taxes. So if you earn say $100 worth of interest in a year on your savings account, it’s the equivalent of having $100 added to your annual income for tax purposes (people, don’t come for me about marginal tax rates and deductions, this is ELI5 ok?)
Dividends are most typically paid from stocks. Dividends are a companies way of saying “thank you for owning our stock, we are going to share some of our profits with you! We are going to pay you an annual dividend for being a loyal shareholder.” If you were to buy 100 shares of JP Morgan tomorrow (symbol JPM $182.25), that would cost you $18,225. JPM pays an annual DIVIDEND based on the stock price above of 2.52%. So $18,225 x 2.52%= $410.06.
The difference between interest and dividends is this: depending on your income level, that $410.06 is taxed at the Qualified Dividend Income rate of 15%, not like your savings account interest above. And if you earn less than $45,000, your tax rate is 0%. Most Americans will pay 15% taxes on these dividends—the rate goes up to 20% for people making over $276k (single).
One of the other differences is stock dividends above are discretionary. A company can raise their dividend or cut it. Cutting a dividend rarely happens because that’s a blatant signal “We’re struggling bad, we can pay you as much anymore”, which also means the underlying stock you just bought is about to take a nose dive. So while you were thinking “I’m going to put my savings in a dividend stock/stocks because I’ll pay less taxes!” There’s no guarantee you’ll sell the stock for a profit or even what you paid for it. I’m in wealth management so I tell my clients not to invest any money they plan on using in the next 12-18 months—I can’t guarantee you’ll get back what you put in. Keep it in savings/money market.
Here’s a [link](https://turbotax.intuit.com/tax-tips/investments-and-taxes/guide-to-taxes-on-dividends/amp/L1jBC5OvB) to the dividend tax rates I was crudely mentioning above.
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