Taxes & Switching To DIY Investing

This is a tax simulator to simulate how the cost of taxes for realizing capital gains in a personal taxable account compares to the savings from a switch to lower fee investing. You can modify the fund and advisor rates, rate of return, personal income, time-frame, account size, and embedded capital gain.

The switching option is selling and realizing capital gains now, paying tax on them, and resetting the adjusted cost base (ACB). The capital gains in the future are taxed compared to that new ACB. This is compared to deferring the gains until later, but continuing with the higher fee-drag.

Drawdown Impact: One of the benefits of not realizing capital gains is that the deferred tax stays invested and grows. There may also be a tax bracket change: bumping tax brackets now. Realizing the gain over several years may attenuate that (you can adjust and see). You may also have a lower future tax bracket when you realize the gain if you make less in retirement. Counteracting those benefits of delay are more growth if you have a lower fee structure for many years before then, resulting in a larger portfolio. Also, the fees don’t disappear and drag on your net income during drawdown. You may also need to sell some of your investments to make up the difference and the embedded tax liability will be higher if you did not reset it by realizing the gain and switching. Lot’s of moving parts. So, I show a breakdown.

Portfolio Value: The most common thing that will be pointed it is that the value of your portfolio will drop if you realize gains and have to use some of it to pay the tax. Even with that, the easily seen value may grow faster and make up for that over a few years. What is forgotten is that there is tax liability embedded in the account and when that is accounted for, the catch up period is much faster. Perhaps even immediate if you were planning to realize all of the gains in the next few years anyway.