Costs of switching out of a bad taxable fund

This Microsoft Excel worksheet allows you to compare the tax costs of holding on to a bad taxable fund (high costs, or high taxes) versus paying the tax bill now to switch. You only need to edit lines 2-3 to give current tax rates, and line 7 to list your current holdings in Funds A and B and their basis. The "Tax on distributions" is the total tax you pay, not the rate; the "Future" CG tax is the tax rate that will apply when you sell the funds.

The worksheet is currently set up to compare two funds which are identical except that Fund A has 0.5% higher expenses; both funds yield 2% in qualified dividends or long-term gains, and the 2008 tax rate of 15% is assumed to be permanent. It takes eight years for this difference to make up for the 7.5% immediate tax loss for switching, because switching increases your tax basis.

The assumption made in the worksheet is that you will reinvest all distributions in Fund B, whether you sell your Fund A now or keep it, since you prefer Fund B. The after-tax value is the amount you will have left after a given number of years after selling the funds and paying the capital-gains tax; if you plan to sell the funds over a long time period (such as retirement), use the line which corresponds to the middle of retirement for the comparison.

General disclaimer: any calculations made with this worksheet are only as accurate as the assumptions made about future returns and taxes; past performance of the funds is not an estimate of future results. This worksheet is not intended to provide financial or tax advice; consult a financial or tax advisor.

Worksheet (Excel)

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