Author Topic: Need advice on choosing between two investment accounts (Norway)  (Read 992 times)


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Hi guys. I'm a Norwegian mustachian, working hard towards my goal of FIRE!
The question I have today is very Norway-specific, but I would appreciate it if I could get some advice on what to do.

There are basically two ways of investing in mutual funds in Norway:
- Option 1: Mutual Fund Account in a Norwegian bank (this is what I currently do)
- Option 2: Investment Account in a brokerage firm.

Now, the major differences between these two options are:
- Option 1: If you sell any of your shares in a fund, you have to pay 28,5% tax on capital gains. This makes rebalancing troublesome, in that I can't easily sell shares in a stock index fund and buy shares in a bond index fund in order to rebalance at a later stage, without having to pay this capital gains tax.
- Option 2: In this account you can freely sell and buy shares in all kinds of index funds without having to pay capital gains tax. Only when money is transferred out of the account to a checkings account capital gains tax will have to be paid.

This all makes option 2 sound great, right? Well, it's not that easy. The reason for this is something called "skjermingsfradrag", which might be translated to "the standard deduction" - it's a tax benefit that only applies to option 1.
I'll try to explain how this works as simply as possible (which is quite hard, as I find it pretty confusing myself).

The way it works is that the central bank annually decides this deduction rate. This rate is based on the minimum interest rate of the central bank, and varies from year to year - if the interest rate is high, the deduction will be high, if the interest rate is low (as it is currently), the deduction will be low.
Previously the deduction rate has been as follows:

2006    2,1%
2007    3,3%   
2008    3,8%
2009    1,3%   
2010    1,6%   
2011    1,5%   
2012    1,1%   
2013    1,1%   
2014    0,9%
2015    0,6%   

How it works is like this:
Lets say I invested 100.000NOK in 2006 with a 7% return up until 2015. For the sake of the example no additional investments were made.
If my calculations are correct, the 100.000NOK would have become 183.846NOK after 9 years, 83.846NOK being the capital gains.
The standard deduction rate enables the principal to "grow" each year for tax calculation purposes, so that some parts of the capital gains become tax-free.
For 100.000NOK invested in 2006 the principal "grew" to 102.100 based on the 2,1% deduction rate that year. It would've continued to grow each year according to the deduction rate until it eventually is sold.
Our 100.000NOK principal would've turned out like this from 2006 to 2015:

2006    2,1% - 102.100 NOK
2007    3,3% - 105.469,3 NOK
2008    3,8% - 109.477,13 NOK
2009    1,3% - 110.900,33 NOK
2010    1,6% - 112.674,74 NOK
2011    1,5% - 114.364,86 NOK
2012    1,1% - 115.622,87 NOK
2013    1,1% - 116.894,72 NOK
2014    0,9% - 117.946,77 NOK
2015    0,6% - 118.654,45 NOK

This means that if I would've sold all my shares in 2015 I would've had to pay capital gains tax as follows:
183.846 - 118.654,45 (principal adjusted with yearly deduction rates) = 65191,55 (taxable capital gains) x 28,5% = 18579,592,- in capital gains tax.

If I had invested this sum in option 2 I would not have gotten this benefit and would've had to pay capital gains tax on all capital gains: 83846 x 28,5% = 23896,11,- in capital gains tax.

I hope some of you understood my poor explanation here - I just wanted to make things clear before asking for advice on the following:
- Would you go for option 1 and the tax benefit? Or option 2 for easy rebalancing without the tax benefit?

I started out with option 1 thinking I could just rebalance as I went along by buying bonds later on in the accumulation phase. (I currently own 100% stocks, but eventually want to own 70%/30% stocks/bonds or something similar). However, I now realize I won't be able to catch up with the market swings with my income when the invested amount becomes big enough. Additionally, since I'm planning on retiring early (hopefully within 7-8 years), rebalancing becomes more crucial at an early stage, and I don't want to be "stuck" with an allocation that is higher or lower than my risk tolerance, just because I don't want to sell shares in order to avoid the capital gains tax.

I'm sorry for the wall of text, but I would really appreciate it if I could get some guidance from you guys! I'm leaning towards going for option 2, but I'm a bit worried about missing out on the tax benefit, especially if the interest rate grows in the future.
I don't have too much invested at this point, so I could easily switch from option 1 to 2 if necessary.

Thank you very much for your help!
« Last Edit: August 09, 2016, 11:58:31 AM by aldrimer »


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