How do taxes and fees change your return?
What quietly drains from your gains.
What an investment earns does not necessarily all stay in your hands. Small fees every year, and tax on the gains: think about the return you actually keep.
In 30 seconds
- Fees steadily reduce, year after year, the money that should be growing.
- Leave $100,000 to grow at 4% a year for 20 years: with a 0.25% annual fee it becomes about $208,000; with a 1% fee, about $179,000.
- Tax on gains differs by country and product. What you keep is what remains after fees and tax.
Taken from what grows.
Fees reduce, year after year, the money that should be growing.
A gap of about $30,000 over 20 years.
The difference between 0.25% and 1% a year opens wide over 20 years.
Value of $100,000 left for 20 years at 4% a year, with a 1% annual fee
About $208,000 with 0.25%; about $198,000 with 0.50%.
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A worked example
The SEC’s page shows $100,000 growing at 4% a year for 20 years. With an annual fee of 0.25% it becomes about $208,000; with 0.50%, about $198,000; with 1.00%, about $179,000.[1]
The gap between 0.25% and 1% a year comes to about $29,000 over 20 years (our calculation).
Gains are taxed too.
Tax on what you gain differs by country and product.
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A hypothetical calculation
For example, if a $1,000 gain were taxed at a hypothetical 15%, you would keep $850 (our worked example; actual rates differ by country and product).
Tax systems differ greatly by country. Check with your country’s tax authority.
What to read is what you keep.
Compare after fees and tax.
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Read the disclosures
The SEC’s page advises reading disclosure documents to find out what you will be charged, and understanding and comparing fees.[1]
Rules that require costs to be shown as an amount and a percentage are covered in “There is a price beyond the price tag.”
A scale for reading what remains.
A scale for reading the return you keep.
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Annual fees
What percentage is charged each year.[1]
Tax
What tax applies to your gains.
What remains
How much you keep after fees and tax.[1]
This is not advice
This edition explains the effect of fees and taxes. It does not recommend any product or way of reducing tax. For tax questions, check with your country’s authority or a professional.
Next question
NEXT QUESTIONThere is a price beyond the price tag.NEXT QUESTIONInterest brings more interest with it.See the Field Notes shelf →What this edition cannot tell you
- Tax rates and tax systems by country.
- Specific fee figures by product.