Although you should keep some money in the bank, most of your saving and investing should go elsewhere, because of:
1. Low returns. You probably will earn 5 percent or less in bank accounts.
2. Taxes. The interest you earn on a bank account is taxable at your highest tax rate.
Therefore, you should keep a cash reserve in the bank and do most of your investing in stocks, where the long-term results have been excellent. There are tax advantages, too.
* You owe no tax on paper profits. As long as you buy and hold your stocks and stock funds, your gains won’t be taxed.
* Dividends get a break. Through 2010, stock dividends are taxed no higher than 15 percent.
* Long-term capital gains get a break, too. If you take profits on stocks held more than a year, the maximum tax is only 15 percent, through 2010.
* Capital losses can be matched with capital gains. If the stocks you own lose value, you can sell at a loss. That can prevent you from paying any tax on gains you take.
If you invest in stocks, you can take your losses and leave your winners alone, which will keep taxes in check as your net worth increases.
