LEIF LARSON: American Economy Needs GROWTH Act

Warren Buffet was asked how long he preferred to hold stocks that he bought for Berkshire Hathaway. His answer was succinct: forever. Buy good companies and hold on forever. As they grow, you earn paper profits you can use later in life.

Smart investors, like my Dad, follow the Sage of Omaha’s advice. They don’t try to time the market. They don’t jump in and out of stocks. They buy and hold. That’s the best play for people who are investing for the long term. When your goals remain years off, such as retirement or in my Dad’s case, college funds for the grandkids, you don’t want to face capital gains taxes each year.

However, there is one thing that investors like my Dad need to be aware of: they are being punished by federal law. If they invest in mutual funds and leave their money alone, they can still face tax hits. If the fund sells stocks and realizes gains, the investor may have to shell out to the IRS in April, even if they leave the money invested and never pocket the gains.

“Mutual fund shareholders outside of tax-preferred accounts are taxed annually on distributions of gains, interest, and dividends, despite not having sold their shares,” the Investment Company Institutenotes. “This puts mutual fund shareholders at a disadvantage to other investors—whose capital gains taxes are not due until the investor realizes those gains.”

That seems impossible to believe: how can you be taxed on what you do not have? But it is true. “Under the current law, investors are taxed annually on mutual funds they invest in on dividends and capital gains that they don’t receive,” the groupSecure Financial Future writes.

Luckily it does not have to be this way. Earlier this year, Republican Sen. John Cornyn of Texas and Republican Reps. Beth Van Duyne of Texas and Democratic Rep. Terri Sewell of Alabama proposed the Generating Retirement Ownership Through Long-Term Holdings (GROWTH) Act. It aims to protect the nearly 40 million mutual fund investors that are facing unfair taxes on earnings they never see from shares they never sold.