The guideline answers do not tax inflation. They also don’t say that the portfolio returns are non-taxable. I think that’s a contradiction.
Briefly, the Tracys need 4.5% after-tax income, inflation is 4%, taxes are 20% on withdrawal. I calculated the pretax nominal return as (4.5% + 4%) / (1 - 20%) but CFAI says it’s 4.5%/(1-20%) + 4% ( both in additive terms.)
I’ve been told that CFA Institute’s default position used to be that accounts were not taxable; I’ve been told that CFA Institute has changed their default position to accounts being taxable.
However, that’s moot here; make sure that you understand the vignette: Briscoe expects a tax rate of 20% to apply to the Tracys’ withdrawals from the investment account. You noted that yourself, above.
As I’ve said before, my experience with CFA Institute has been that they’re clear whether the account is taxable or not. Here, clearly, the account is not taxable.
True, good point. No tax mentioned on returns. Thanks as always!
My pleasure.
This stuff ain’t easy, is it?
So if they sy “taxes are 20% on income and capital gains” would that be the hint that returns are taxable even if they stay inside the portfolio?
Have been doing some CFA past exam questions, but I found that CFAI use mostly this as answer 4.5%/(1-20%) + 4% as their standard answer.
Have they ever use “(4.5% + 4%) / (1 - 20%)” as their answer?
Have anyone figure out it?
It would, indeed.
So you are saying if taxes are on withdrawal only, then we gross up the return for tax then add ininflation
however if taxes are on income and cap gains, we add inflation to the pre tax amount then gross up for tax.
does that bookend this discussion?
got it.
i think andyt got this right
if tax on withdrawls only then do what you normally do
if stated otherwise
add up inflation to return and gross up.
READ vignette ultra carefully.
WTI >> Withdrawals only, gross up Tax, then add Inflation
TIT >> Taxable account add Inflation then Tax
Just remember TIT (shldnt be hard) and dont rhyme the two
Another mnemonic
so…only withdrawals taxed = no tax on inflation. so you find before tax returns, then add inflation
taxes on capital gains and dividends = taxes on full return, so you add inflation and THEN find before tax
can someone confirm this?