2009 individual IPS-tax part

In the first 2009 essay question, why we need to convert to pre-tax dollars right after calculating first year cash flows? A lot of other examples do pre-tax calculation after you get the return rate plus inflation. If we do this way, the return objective would be 10.625, which is very different from the guideline answer of 9.86% Thanks in advance.

This is all to do with the type of tax account the customer has. If you have a TDA then inflation is deductible and you can gross up the income need before adjusting for inflation. (1+((income need/(1-T))/assets))*(1+inflation)-1 This is different from the standard method where inflation isn’t deductible and you adjust the standard manor, i.e. ((1+(income need/assets))*(1+inflation))/*(1-T)-1 FYI i took this exam last year and failed. Mainly because i didn’t know the syllabus to this level of detail…happy hunting.

eadesr, Have you seen any example(s) in the text book that does in the way from the exam? I have looked through all the IPS example was not able to locate it. Especially since last year excluded the TDA tax from the cirriculum… Thanks

I just took a quick glance at the question, and noticed the question didn’t specify that the portfolio would be invested in TDA…how no idea how the they expect us to do it in that way? I have a hunch that this question was written by a different author then the text…hence they work out the questions differently.

It states the tax rate only applies to withdrawals. Sneaky CFA.

I think pullbackking has brought up excellent points. You can see the original CFAI response along with long discussions on this subject in the following thread: http://www.analystforum.com/phorums/read.php?13,1131550,page=1 I still think it should be 10.625% even for a TDA, as some of us also feel the same way. The inflation growth portion of the portfolio will eventually be taxed someday (“Tax Deferred”). At that point, the real value of the portfolio will not maintain as planned initially, unless the Q states the remainder of the portfolio will be transferred at investor’s death to heir/charitable organization under a “tax-free” rule.

great answer easesr could not figure this thanks

Hi James@houtston, thank you for the feed back and link. Perhaps they constructed this question based on the fact the the 2 global tax chapters were historically in the cirriculum.

I still agree with James, and there was no mention of TDA at all. It did say withdraw tax, but don’t they withdraw money for living expense every year? Or only “taking out the whole thing” is called WITHDRAW?? another issue is does it mean if you didn’t hit the magic figure you will loss ALL the point on a return calculation like this?

I am a retaker from last year and i came up i came up with the 10.625 number last year. there was a whole discussion about it last year. i looked for the same example in the cfai texts and all the practice exams i have and could not find one. i agree with pullbackking. ndzhai - i think you’ll get partial credit up to the point of the calculation. Maybe a couple of points each for list of investable assets and list of cash flows.

thanks sct, at least I will get a little bit for this in the exam it is a low probability thing for me to hit the magic number for return calculation anyway, :frowning: