This questions asks asset allocation among asset classes and locations, tax deferred vs light capital gain tax etc. When selling 500K equity in TDA account and moving it to taxable account, a 25% tax needed be paid. Right? CAFI wrong? Sorry if this has already discussed.
Can I ask where to get 2010 AM exam? Thanks a million!
Got it. Thanks for your kind help guys!
glacier88 Wrote: ------------------------------------------------------- > This questions asks asset allocation among asset > classes and locations, tax deferred vs light > capital gain tax etc. > > When selling 500K equity in TDA account and moving > it to taxable account, a 25% tax needed be paid. > Right? > > CAFI wrong? Sorry if this has already discussed. Nope not wrong. It is asking the amount of bonds and stocks to be moved. It did not ask for the final amount that would be in the account. As it mentions in the answer set: “Selling the bonds in the taxable account results in realizing taxable losses equal to USD 50,000 at the current tax rate of 25%, which can then be used to offset income.”
What you quoted is just for the selling of bonds in the taxable account to realize loss. Withdrawal from the TDA is taxed at 25% flat. This is given but it was not accounted. So two questions arise. First whether it still makes senses to move stocks to taxable account? Second to achieve 50-50 allocation, there will be less bonds too.
I have this wrong too, just found in exhibit 1 for TDA, that reallocations are not subject to tax, this could be explanation, anyone pls confirm.
Am I completely missing something here? I thought you could only contribute up to 40k to the TDA.
well I am not sure what reallocation is exactly, I would think it is something like rebalancing, but not sure…
DPAK: It is “coordinated” re-balancing to more tax efficient allocations in each… In TDA buying bonds(+500K) & selling equities (-500K), net impact to total TDA account balance $0, no taxes resulting from transaction b/c “portfolio realloc not subject to tax” The “reallocation/rebalance” in TDA from Eq to Bonds doesn’t count toward the $40K max contribution. In taxable acct, buying equities(+500K) & selling bonds(-500K), net impact to acct $0, realizing Bond loss of $50K. The consolidated (TDA plus Taxable) portfolio mix of Bond v Equities remains the same (that’s the coordinated part) Hope this helps I’m a retaker - the $40K thing got me last year.
thanks MBC - that REALLY helps!
Don’t you get so mad at yourself over things like this!?! It just doesn’t make sense, until suddenly it does. second the thanks.
Ahh! Thanks mbc! Exam takers’ fallacy! The question was phrased like selling bonds in taxable to buy bonds in TDA etc.
ok here’s what i don’t get - i understand why we’re moving all the money from taxable to TDA for bonds. i don’t understand why we’re shipping all the equity TDA $ into taxable. did i misunderstand the meaning of “maintain current asset allocation”? i figured that means between bonds and equity, not between TDA and taxable. if that’s it, then i get it. but if that’s not it, why would i want to move money from a TDA into a taxable just cuz tax went down? isn’t it still better for all my gains to be deferred?
the solution is quite confusing!!! i still don’t get what it means.
I don’t get the following in solution: “Under the new tax laws, interest income will continue to be taxed 25%, realized capital gains will be taxed at 15% and dividends will not be taxed. These trades place the higher taxed income-oriented assets in the tax-deferred account and the lower taxed capital gain and dividend paying assets in the taxable account” i’m confused…
-272Celsius Wrote: ------------------------------------------------------- > I don’t get the following in solution: > > “Under the new tax laws, interest income will > continue to be taxed 25%, realized capital gains > will be taxed at 15% and dividends will not be > taxed. These trades place the higher taxed > income-oriented assets in the tax-deferred account > and the lower taxed capital gain and dividend > paying assets in the taxable account” > > i’m confused… Higher taxed assets are placed in tax-deferred. You will only get taxed when you withdraw from this amount. So income which you get from interest will not be taxed till it is withdrawn. Capital gain is taxed only when it is sold. So it is being placed in taxable account.
I think you guys may have misunderstood the question. Client wants to maintain her current allocation in the aggregate at 50/50 stocks and bonds and wants to do so in the most tax efficient manner. Secondly there is no transferring of funds between accounts like a couple of posters have suggested. You sell 500 of bonds in taxable account, use it to buy 500 of equities in the same account. To keep the allocation in balance, you sell 500 of equities in TDA and use the proceeds to buy 500 of bonds. Again no transferring of funds and in the end,you have 750 of bonds in TDA and 750 of equities in taxable account. So why did we do all this? In order to maximize tax benefits. The bond Interest, which was previously taxes at 25% now grows deferred in the TDA, she also gets to book the loss which she can use to offset gains elsewhere (remember this benefit is set to expire in the coming year), and her capital gains in the taxable account will now get taxed at the 15% rate. This is the most tax efficient allocation given the stipulated constraints.
Thanks jorgeam86.