My partner and I recently decided to start saving to build a new home in 10 years or so. I’ve been saving for my retirement via a 401k plan for some time, but saving a significant sum for a shorter-term goal is fairly new to me.

Mutual FundsSince we have an investment horizon of 10 years and the flexibility to wait a few years longer if we need to, it makes sense to invest in stocks or mutual funds to get the greatest return. I’d rather not have to monitor my investments daily, so I started my research by focusing on mutual funds. After all, I’ve been investing successfully in my 401k plan’s mutual funds for nearly 10 years already, and it seems simple enough.

I soon discovered that investing in mutual funds for anything other than my retirement is going to be much more complicated because of the tax laws. There’s no tax-sheltered account for saving for a house or any other goal not specifically approved by the government. If I invest in mutual funds in a taxable account, I have to take a whole new set of variables into consideration:

  • When my fund makes a distribution I’ll be taxed on it. If I’m unfortunate enough to buy a fund right before a distribution, I’ll be getting taxed on gains I didn’t realize! It’s important to find out when the fund makes distributions to avoid this.
  • When I sell my fund shares I will have to calculate my cost basis for tax purposes. If I only purchase the fund one time and it never makes a distribution, this is easy. Typically, though, I’d be buying more shares over time and reinvesting the distributions. This complicates things considerably.
  • Funds with low turnover ratios tend to be more tax-efficient, so I need to look for that. Morningstar will show you tax-adjusted returns for a fund, which can be helpful, but there’s no guarantee your fund will behave the same way in the future.

Those are just a few of things you need to be aware of when buying funds in a taxable account. Stocks are a little different ‘“ you get direct control over the timing of your capital gains in return for micromanaging your investments, but your stocks may still pay taxable dividends. Bonds are different too, because some are taxable and some are not. And then of course there’s the taxable interest from a plain old savings account.

Why does this have to be so difficult? Shouldn’t the laws make it easy for people to grow their wealth?

Sure, there are a few things that the government says it’s ok to save for – retirement, education, and medical care. Even if you’re going to save for one of these ‘approved’ goals though, the options can be confusing, if they’re available to you at all.

For retirement goals, you have 401k, Roth 401k, IRA, and Roth IRA. If you make too much you can’t have a Roth IRA, and the contribution limits on IRAs are pathetically low. You can only get a 401k through your employer, and your employer decides on the available investments, so not all 401k plans are created equal.

The education options make the retirement savings vehicles seem straightforward. For education you have 529 plans, Coverdells, UGMAs, UTMAs, and some people use savings bonds or IRAs for these purposes as well.

For health care, you have MSAs, which aren’t widely available, and HSAs, which have mostly made MSAs obsolete. Both of these are only available if you’ve enrolled in certain insurance plans, so if you’re uninsured, forget about saving up for health care.

For any other goals, you’re out of luck. The fact that we have savings plans where your money grows tax-free is an admission that such accounts encourage saving, or at least that we should be doing something to encourage people to save. So why are we penalizing people for saving for other goals? And why are we leaving people at the mercy of their employers for their retirement plans, or their insurance companies for their health care savings options? Shouldn’t everyone be able to contribute $14k per year to a retirement account that grows tax-free, regardless of their employer? Shouldn’t everyone be able save up for health care costs, regardless of their insurance?

So here’s what I’m getting at ‘“ we should quit taxing interest, dividends, and capital gains in all accounts. Then we can all reap the benefits that a Roth 401k would give us without having to rely on our employer for good investment options. Then we can set aside money for health care expenses and let it grow, and although it would be post-tax money at least it would grow tax-free. Then we can all save for college for ourselves or our children without wondering if the savings vehicle we’ve chosen will even exist in next year’s legislation. And even better – we can save for other goals like a house, a car, a vacation, or starting a business, just as we currently can for the government-approved savings goals. Saving for big goals should be easy by default – tax-free accounts should be the rule, not the exception.

Oh that’s right, we wouldn’t want a few rich people to get away with making lots of untaxed money off investments. Even Warren Buffett has criticized the 2003 tax cuts on dividends and capital gains. That’s easy to do when you’re a billionaire, but maybe the rest of us could use some encouragement in the form of a simpler tax system.