When you're trying to save enough to
retire rich, taxes are your enemy. Yet as the saying
goes, sometimes it makes sense to keep your enemies close to
you.
Given unprecedented
budget deficitsand the possibility of new,
costly government programson the horizon, pretty much
everyone now expects income tax rates to go up in the future.
In order to beat higher taxes before they get you, you may
actually need to consider something you would normally never
even think about:
paying taxessooner rather than later.
When deferral doesn't work
Ordinarily, it's smart to put off paying taxes as long
as possible. After all, every dollar you pay in taxes is a
dollar that you can't invest. Paying taxes earlier than you
have to costs you not only that dollar, but also all the
income and capital gains that it would have generated for
you. Conversely, by deferring tax, you're the one who earns a
return on that money, not the IRS.
The situation changes, though, when you know that tax
rates are going to increase in the near future. Obviously,
there's a powerful incentive to pay $1 in tax today if by
doing so, you avoid having to pay $2 in tax tomorrow.
That's why you should take a close look at three different
strategies designed to make the most of today's lower tax
rates while they last.
1. Take your gains.
One of the best things about investing in stocks is
that you don't have to pay tax on your capital gains until
you sell. If you're a
buy-and-hold investor, therefore, you have complete
control over your tax liability. With today's 15% maximum
capital gains rate in danger of rising to 20% or more, it
might be better for you to sell now and pay tax at a lower
rate than to hold on and have to pay more in taxes later.
For instance, say you have a big gain on a stock you've
held for a long time. You anticipate you'll need to sell
1,000 shares within the next few years to cover your living
expenses. Take a look at how much you might save by selling
now versus waiting until a higher tax takes effect:
Stock
Year Bought
Tax If Sell Now
Tax If Wait Until 20% Rate Applies
Microsoft (Nasdaq: MSFT)
1989
$3,677
$4,902
Google (Nasdaq: GOOG)
2004
$54,696
$72,928
PotashCorp (NYSE: POT)
1999
$12,288
$16,384
Coca-Cola (NYSE: KO) Continued... |