With the election edging closer and both sides getting more vocal it is easy to overlook some fundamental ways that Uncle Sam is your ultimate investing partner.
Yes, that same Uncle Sam to whom you pay taxes. Think he’s never very generous? Think again.
Here are three reasons why Uncle Sam is actually a pretty good investing partner:
1. Sam trims your tax bite if you hold stocks for a long time. Why? You get rich, he’s gets rich. Uncle Sam gives you a huge tax break if you hold investments for twelve months or more. Let’s say you’re in the top tax bracket (39.6%). The tax savings of holding investments for a year or more are 100 percent (20 percent long-term capital gains tax versus 39.6% tax on short-term gains).
Example: Let’s say your portfolio has a profit of $5,000 after six months. If you sell (and are in the top tax bracket), Uncle Same gets $2,000 — roughly 40% of your profit. You keep $3,000.
But let’s say you hold onto your stock for a full year. And let’s assume that instead of growing in value it actually loses 20% of its value! Now you’ve only made a $4,000 profit. After Uncle Sam’s cut ($4,000 x 80%) you have $3,200. Hello? You’ve got $200 more than if you sold it earlier!
2. Uncle Sam created the 401(k). Why? Because he’d rather you save for your golden years than have to foot the bill himself. Uncle Sam helps you by insisting that every dollar put into your 401(k) lowers your tax bill. And, every dollar you invest grows tax deferred. Let’s assume Social Security won’t be around when you need it. Take care of your 401(k) so it will take care of you!
3. Sam’s cousin, Uncle Ira. Why? Uncle Sam is pretty sure Social Security will be history. In addition to your 401(k), everyone would be wise to set up an Individual Retirement Account, or IRA. They come in two flavors (Traditional or Roth). Uncle Sam gives you similar benefits to those outlined above in the 401(k). If you choose a Traditional IRA, every dollar invested lowers your tax bill. If you choose a Roth IRA you put in after-tax dollars but don’t pay any tax when you cash out your account! Both IRAs allow for tax-deferred growth. And that can seriously impact your investment bottom line for the better.
So, sure. Uncle Sam asks that we pay taxes to help fund all of our public infrastructure. But you gotta admit, these perks make Uncle Sam one of your best investing partners.
Note: the illustration in point 1 is from the excellent book, “Eight Steps to Seven Figures” by Charles Carlson.
Related:
Important Things to Consider with Your Retirement
How Much Should I Be Saving For Retirement?
Early Start on Retirement…?
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