2010 Q1-E(iii)

[tangyoulei]

anyone can please explain to me why you should move all $500mn equity from TDA to taxable account?

the guidence says it’s because the lower capital gain and dividend tax rates compared to income rate. but doesn’t TDA only “defer” all the three taxes and eventually both accounts would charge the same tax?

[cfa_student29]

taxes are going to be low on capital gains in future, so makes sense to move equities to TDA, also cost basis of equities here is low

[tangyoulei]

@cfa\_student29

taxes are going to be low on capital gains in future, so makes sense to move equities to TDA, also cost basis of equities here is low

hi, my understanding is the lowered (to 15%) CG tax would apply to the equity CG regardless which account it’s in. why does it make difference by relocating? probably i missed something in here but i can’t figure it out.

[CenZx]

I second this, why should we buy equities at Taxable? Why cant we leave equities in TEA?

This led to another question?why do we need to sell equities at TEA?

Unless it is implied that only taxable account gets to enjoy the lower rate.

[CenZx]

I do a search and found this, this seems to be the most reasonable explanation

@jorgeam86

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.

[tangyoulei]

thanks. i think this makes sense, *if* the question requires maintaining the current allocation *and* current location. because after moving the bond assets from taxable to TDA, the current allocation was maintained (e.g. 50/50 bond and equity). the only purpose to move the equity from TDA to taxable that i can see is to maintain the current location (e.g. 50/50 TDA and taxable) - i don’t think the question asks this.

so, i see the benefit of the 1st step of relocating bonds to realize loss for tax harvesting. however i still cannot see the tax benefit for the 2nd step - relocate $500mn equity from TDA to taxable…

@CenZx

I do a search and found this, this seems to be the most reasonable explanation

@jorgeam86

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.