If you hold investments in a taxable account, you have to pay capital gains tax on them. If you just hold investments in an IRA, you don't pay capital gains each year. Instead, you will pay income tax when you take a distribution. Further, if you are currently in a very low tax bracket, you might not owe capital gains tax, but this rule is expected to change shortly, so don't count on it!
Capital gains tax has two different rates. If you hold an investment a year and a day, your rate currently is 15%. I have heard that in 2011, the rate may increase to 20%, which is still likely lower than your income tax rate. If you sell an investment in less than a year, you pay tax at your nominal income tax rate. This difference is one reason why long-term investment strategies might result in lower taxes.
Be prosperous!
Peggy
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