Passive Income Investing Ideas to Grow Your Wealth

You’ve likely seen ads about making money in your sleep. The hype might oversimplify how it all comes together. However, passive income investing can set the wheels of financial vehicles in motion for your money to generate income for you instead of you exerting yourself for cash.

Here are passive income investing ideas that can help you grow your wealth.

What Is Passive Income?

Passive income is money earned without you putting in sustained work for it. To see it better, contrast it with active income. You put in time at your job and receive money for your time and effort. That’s active income. With active income, your time is traded for money. 

While passive income requires effort up front to get things going, passive income is generated over time with little to no participation from you. For many, passive income can provide financial independence.

Ideas for Passive Income Investing

Passive income investing is one way to generate earnings through little effort. Here are some ideas for passive income investing to consider.

Investment-Based Passive Income Ideas

Investment-based passive income is earned by investing in dividend stocks, bonds and bond index funds, annuities and mutual funds, and private equity and venture capital. 

As you might guess, building a passive income investing portfolio can create a higher income potential than a lower-risk interest-based or property-based strategy.

Dividend Stocks

You can buy a stock to hold on to, and the company pays you part of its profits. Dividend stocks are popular with investors looking for steady, regular income. The yield on dividend stocks can be modest, around 2%, and companies can cut dividends. But solid research can lead you to dividend stocks that you can buy and just let the income flow. 

Bonds and Bond Index Funds

Companies or governments issue bonds to fund projects. When you buy a bond, you’re loaning the company money. The company pays you interest over the bond's life, returning your principal investment when the bond matures. 

Investing in bonds can diversify your portfolio, and investing in bond index funds allows you to seek passive income from bonds without the risks associated with buying individual bonds.

Annuities and Mutual Funds

Annuities and mutual funds can offer passive income opportunities but in different ways. An annuity is offered by an insurance company and guarantees a payment for a fixed period or for life. The payment can vary depending on the type of annuity: fixed, variable, or indexed. 

A mutual fund pools many people's money to purchase stocks, bonds and other securities. Unlike an annuity, a payment isn’t guaranteed because mutual funds depend on the performance of the securities but can pay dividends and distributions.

Private Equity and Venture Capital

Private equity and venture capital invest in businesses. However, private equity typically invests in existing private companies in exchange for ownership, and venture capital invests in early-stage companies, such as startups, in exchange for an equity stake. 

If the companies perform well, you earn passive income because you aren’t actively involved in operating the companies. Both are considered high-risk investments – private equity because it's illiquid and you typically must stay invested for five or 10 years, and venture capital because its companies are young.

Interest-Based Passive Income Ideas

If you’re looking for something safer, consider high-yield savings accounts or certificates of deposit (CDs). With an interest rate set by the Federal Reserve and your principal insured by the federal government, these accounts carry less risk than stock investments.

High-Yield Savings Accounts

With a lower risk comes a lower return, but high-yield savings accounts typically offer interest rates higher than your traditional savings account. You’re also gaining interest on your principal, which is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.

Certificates of Deposit (CDs)

A certificate of deposit is also an interest-bearing account, but unlike a high-yield savings account, a CD pays a fixed interest rate for a specified duration, and you must hold on to it until it matures.

Alternative Investment-Based Passive Income Ideas

Alternative investments don’t fit into traditional asset classes like stocks and bonds. They typically carry a higher risk, too. Real estate, real estate investment trusts (REITs) and cryptocurrency are three alternative investment-based ideas you can pursue for passive income.

Real Estate

Several ways of investing in real estate can provide you with passive income. Generally, rental income from owning and renting a property is considered passive income by the IRS as long as the tenant uses the property and the income or potential income is received for using that property. (More on that later.) 

You could also consider real estate crowdfunding and mutual funds for passive income.

REITs

Real estate investment trusts are companies that own and manage real estate. You can buy shares of a REIT, exposing you to real estate without dealing with issues with owning physical property. REITs pay a dividend to shareholders. The IRS requires them to pay 90% of their profits to shareholders.

Cryptocurrency

You can potentially create passive income streams from several cryptocurrency investing methods. As with any other passive income investment, you have upfront work, but then you have the potential for continuous earnings. 

Consider staking, where you lock up your coins in a digital wallet for someone else to use, earning you rewards. You can also lend your coins to someone to earn interest, known as yield farming, where you can earn interest on coins deposited in a platform.

How Is Passive Income Taxed?

If your income is passive, it is taxed at your marginal tax rate. The IRS defines passive income based on your involvement in a trade or business or as rental income from a property you are materially involved in without being a real estate professional.

It’s important to know how the IRS views your different income streams. Your rental income can be considered ordinary income by the IRS and taxed at your marginal tax rate. 

Dividend income is either qualified or nonqualified. Qualified dividends meet criteria from the IRS, such as having come from a U.S.-based or qualifying foreign company and on stock held for a certain period. It’s taxed at a lower rate. Nonqualified dividends are taxed at your marginal tax rate, which could be as high as 37%. 

The IRS considers digital assets property, not currency. You can be taxed on gains and losses.

Consider Passive Income Investing

Passive income investing isn’t about getting rich overnight. However, with research and effort expended on the front end, you could find additional income streams that help you toward financial independence.

Frequently Asked Questions