Let's look at the various types of investment accounts.
First there is the currently taxable liquid investment account. Interest and dividends on this type of account are fully taxed when earned, except for tax-exempt municipal bond interest and dividends from muni bond funds. Capital gains, and losses, are taxed, or deducted, when an investment is sold.
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Contributions are usually currently tax deductible, at least on the federal level, either by way of being "pre-tax" or via a deduction on the Form 1040. Current earnings are tax-deferred. Distributions from these accounts are usually fully taxed. If there is a basis in the account from non-deductible contributions distributions will be partially tax free. Premature withdrawals, taken prior to reaching age 59.5, and excess contributions are penalized.
And finally there are ROTH IRA, 401(k), and 403(b) accounts. Contributions are never tax deductible, but, as with traditional retirement accounts, current earnings are exempt. If the account is held for at least five years distributions are totally tax free.
Now let us look at how different types of investment income are taxed.
Interest, dividends, and short-term capital gains (on the sale of investments held one year or less) are generally taxed as ordinary income. The tax on this type of income depends on your "regular" income tax rate from 10% to 39.6%. If you are in the 25% federal tax bracket you will pay $250 in tax on income of $1,000. If you are a victim of the dreaded Alternative Minimum Tax (AMT) you will pay either 26% or 28% tax on this income.