Investing With Uncle Sam's Money
Charles Carlson, CFA
Contributing Editor, Dow Theory Forecasts

 Money that you keep from Uncle Sam is money that continues to grow for you. That's why a buy-and-hold investment strategy is so powerful. By avoiding Uncle Sam as long as possible by deferring capital gains taxes, the money you would have paid Uncle Sam continues to earn money for you. In effect, Uncle Sam's money makes you money.

Do the math. Let's say you have an investment with a profit of $5000, and you've held the investment for at least 12 months. If you sold the investment, you would owe Uncle Sam $1000 in capital-gains taxes (20% tax rate times $5000 long-term capital gain).

Now, by deferring the tax man (by not selling your investment), you have the ability to earn money on that $1000 you would have paid Uncle Sam.

For example, if you earn 10 percent on that $1000 that you would have paid Uncle Sam, you'll earn an additional $100. True, you'll eventually have to pay Uncle Sam 20 percent of that $100, but you'll be ahead by an additional $80.

It gets better the longer you hold off paying Uncle Sam. Over 20 years, that $1000 that you would have paid Uncle Sam has turned into more than $7300 (assuming a 10 percent annual return). In effect, you just made an additional $5862 (80 percent of $7300).

That's the true power of tax deferment. Not only do you pay Uncle Sam a lower percentage of the profits if you hold investments for at least 12 months, but you earn money the longer you defer paying Uncle Sam his cut.

More about taxes:
 Taxes 101
 Investing With Uncle Sam's Money
 Tax Tips for Stock and Fund Investors
 Uncle Sam, Investment Partner

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