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Chapter 6. Saving Pre-Tax or After-Tax—D... > When After-Tax Contributions Make Se... - Pg. 70

Saving Pre-Tax or After-Tax--Does It Really Matter? 70 The challenge you'll have is investment selection. If you buy mutual funds you may not be able to take advantage of the new tax rates. Why? Because your gains may end up being short-term. If they are classified as short-term (12 months or less), you don't get the new rate. In fact you pay at regular income tax rates. Only if the investment is deemed to be long-term (more than 12 months), do you get the 10 percent or 20 percent rate. Even though these gains are reinvested, you still pay taxes on them every year. Our Advice The five-year holding period, which begins on January 1, 2001, applies to 28 percent and above tax brackets only. So if you have appreciated securities (stocks, bonds, or mutual funds) consider gifting them to your 15 percent tax bracket child. If you've held these securities for at least five years and gift them, your child receives your wealth and your holding period. This means they could turn around and sell those securities the next day and would pay capital gain tax at 8 percent. Now there's a gift worth giving. Remember, you realize a gain or loss when you sell an investment. With most mutual funds, the manager is buying and selling stocks and bonds every day. Every time she sells the stock or bond