Financial Answer Center

Investing in stocks that offer long-term growth (or growth stock mutual funds with little turnover) and that pay little or no dividends can simulate tax-deferred investing. There is no current income tax to pay if the stocks are not paying current income, and you don't pay tax on the growth until the stocks are sold. So, in effect, you are deferring tax on the gain in your investment. Another advantage of holding stocks for more than one year outside of a tax-deferred vehicle is that, if the stocks are sold at a gain, the gain is taxed at the long-term capital gain rate, rather than as ordinary income. The maximum tax rate on net long-term capital gains is 20% in 2020 for individuals above the top income tax bracket threshold. For the middle brackets it is 15% and for those in the 10% or 15% bracket, the rate is 0%. Investments must be held for more than one year to qualify for these preferential rates. Gains on property held for one year or less are treated as short-term capital gains, subject to tax at the same rates as ordinary income. Please note that these rates may change in the future.