By Senator Mike Crapo
Did you know that nearly half (49%) of the half-a-million households in Idaho own at least one mutual fund? That is approximately $35 billion in mutual fund assets for those households. If you are in one of these households, you already know that current law requires you to pay annual capital gains taxes on these investments, even if you don't sell any shares and capital gains distributions are re-invested into fund shares? Even though you own a mutual fund that includes individual stocks, tax law treats you differently than holders of individual stocks. On October 2, I joined my colleagues Tim Johnson (D-SD) and Judd Gregg (R-NH) to introduce a bill to treat mutual fund investors equally with individual investors regarding tax treatment of capital gains. The Generating Retirement Ownership Through Long-Term Holding (GROWTH) Act will help Idahoans who invest in mutual funds look forward to more profitable, long-term investing and a more secure retirement.
Over the past decade, more employee retirement plans are offering mutual funds as an investment option and mutual funds assets in these plans have increased by over $1 trillion. In 2006, 38.3 million American households owned mutual funds through employer-sponsored retirement plans; 40.6 million households owned mutual funds outside workplace retirement plans. Three-fifths of U.S. households that own mutual funds have incomes between $25,000 and $99,000.
The GROWTH Act would allow shareholders, predominately middle income folks, to defer capital gains taxes until the investment is sold. The bill remedies an inequity that subjects mutual fund investors to yearly capital gains taxes, even if no shares are sold and capital gains distributions are re-invested into fund shares. Mutual fund investors don't receive any income gain or cash in hand when these distributions are re-invested. Taxing that redistribution discourages critical savings efforts.
Mutual funds have an essential role in retirement savings. Among households owning mutual funds, 92 percent are investing for retirement; more than 70 percent say their primary purpose in investing in funds is to prepare for retirement. Many workers do not yet have in place retirement savings to supplement Social Security and, although many employers that have retirement plans offer the option of mutual fund investments, almost half of American workers do not have pension or retirement savings plans through an employer. Additionally, we are retired for longer periods and the costs individuals will bear in retirement are increasing. It's estimated that an individual retiring at age 65 in 2016 will need more than $300,000 just to cover health coverage premiums and expenses. Individual savings efforts also face significant obstacles. Those not covered by an employer's retirement plan, for example, can set aside a deductible IRA contribution of only $4,000 this year - $5,000 if they are age 50 or older.
Mutual funds are a significant part of American workers' preparation for retirement. The tax code should help, not hinder, the process. As a member of both the Senate Finance and Banking Committees, I am keenly aware of the historically-low savings rates of Americans today. The GROWTH Act provides a better tool to grow long-term retirement investments, and this bipartisan legislation will be a step toward promoting sound investing and financial preparation for retirement. While many of us enjoy our work life, we also look forward to retirement when we can choose how to spend our time. We need sufficient financial resources to do that, and resources to cover our healthcare costs, so that that our retirement is spent enjoying our own time and not becoming a burden to our families.
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