Active vs. passive vs. portfolio income | Metrobank (2024)

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Active vs. passive vs. portfolio income | Metrobank? ›

The answer depends on your lifestyle and your risk tolerance. If you like having the security of knowing when your money comes, then an active income is more suited for you. If you do not like being tied down to a 9-to-5 job and prefer having flexibility in your life, then a passive income may be the one for you.

Portfolio, or investment, income is revenue from investments, including dividends, interest, capital gains, and other returns from stocks, bonds, currency exchange, and mutual funds. Unlike active income earned from employment or business activities, portfolio income is based on securities an individual or group owns.

Active income, generally speaking, is generated from tasks linked to your job or career that take up time. Passive income, on the other hand, is income that you can earn with relatively minimal effort, such as renting out a property or earning money from a business without much active participation.

There are three types of income- earned, portfolio and passive. There is also a small subset of passive income called non-passive income.

Active investing requires a hands-on approach, typically by a portfolio manager or other active participant. Passive investing involves less buying and selling, often resulting in investors buying indexed or other mutual funds.

Gross income from passive sources includes: Dividends, interest, and annuities. Royalties (including overriding royalties), whether measured by production or by gross or taxable income from the property.

Passive portfolios typically include a few different types of investments. Principal among these are index funds, mutual funds and exchange-traded funds (ETFs). Rather than select single securities like stocks or bonds, these funds seek to diversify across a number of individual holdings.

The IRS considers a rental activity to be passive if real estate is used by tenants and rental income (or expected rental income) is received mainly for the use of the property. In other words, owning a rental property and collecting rental income is considered passive and not active in most cases.

Retirement income, which often includes pensions and annuities, is another form of non-passive income. These funds are built up during your working years and are paid out to you during retirement.

The IRS has specific definitions for passive income

For tax purposes, true passive income activities are either 1) “trade or business activities in which you don't materially participate during the year” or 2) “rental activities, even if you do materially participate in them, unless you're a real estate professional.”

What are the 4 classes of income? ›

One way some researchers divide individuals into economic classes is by looking at their incomes. From that data, they split earners into different classes: poor, lower-middle class, middle class, upper-middle class and wealthy.

Earned income includes wages, salary, tips and commissions. Passive or unearned income could come from rental properties, royalties and limited partnerships. Portfolio or investment income includes interest, dividends and capital gains on investments.

Active investments are funds run by investment managers who try to outperform an index over time, such as the S&P 500 or the Russell 2000. Passive investments are funds intended to match, not beat, the performance of an index.

Passive investment is less expensive, less complex, and often produces superior after-tax results over medium to long time horizons when compared to actively managed portfolios.

While these may seem like passive income, too, they are taxed differently. Unlike passive income, portfolio income is not subject to Medicare or social security taxes, and portfolio losses can offset your capital gains.

The money you earn in the form of a salary, wages, commissions or tips is considered active income. The more elusive passive income is money generated from investments such as stocks, bonds, real estate holdings or any other income-producing asset.

Portfolio income is money received from investments, dividends, interest, and capital gains. Royalties received from investment property also are considered portfolio income sources. It is one of three main categories of income. The others are active income and passive income.

There are other types of income that can qualify as nonpassive. Income derived from investment portfolios can receive this classification. That can include dividends, proceeds of the sale of investments, and interest. Compensation paid for the destruction or theft of property is considered nonpassive.

In general, passive income comes from putting something you own — property, money or expertise — to work. The revenue you collect in rent, dividends or ad sales are all forms of passive income. Of course, as these examples demonstrate, passive income still requires some effort or labor at least initially.