The software computes and taxes interest annually for accounts with the Ordinary Income tax treatment. And, any interest will increase savings balance based upon the rate of return you enter. Interest income is not used to fund expenses.
If you want more granularity and to account for federal tax free interest income, we generally recommend one of the following methods.
We don't currently offer a "State Only" option, so this will be a limitation. These methods will exclude the interest at the federal and state levels.
METHOD 1
Navigate to My Plan > Accounts and Assets
Create an account with the Ordinary Income Tax treatment
Set the rate of return to zero
Navigate to My Plan > Income > Pensions
Add a Pension to represent the monthly interest
For bonds that are tax free at the federal level, add annual interest as a pension and
select "No" for taxes.
METHOD 2
When you use this method the Planner will increase the account balance based upon your rates of return, but neither the interest not withdrawals will be taxed on any level.
Navigate to My Plan > Accounts and Assets
Create an account with the Capital Gains Tax treatment
Enter a Cost Basis that is higher than your Account Balance
Set your rates of return