🛡️ How much would I save in taxes this year using a return of capital income fund instead of selling index fund shares?

Deciding how to generate cash from a taxable account is a major retirement hurdle. As Wealth Adventures puts it, why not just hold VOO and sell shares when you need income? And this is a very fair question. But the tax consequences of selling versus collecting distributions can be drastically different.

Set your portfolio size and how much cash you want to withdraw annually. To get this income from an index fund, you will collect a small dividend and sell shares to make up the difference.

When you sell index fund shares, you pay capital gains tax only on the profit portion of the sale. As Wealth Adventures notes, if you are selling $11,350 in shares, and you have a 30% gain on those shares, that is roughly $579 in additional tax on the gain portion.

When you hold a high-yield income ETF, you pay taxes on the distribution, but any portion classified as Return of Capital (ROC) is tax-free in the current year. As Wealth Adventures explains, for someone in retirement who needs income from a taxable account and wants to minimize their annual tax hit while preserving their share count, that ROC-heavy income strategy has this little perk.