How is it that the after-tax return (and only taking tax into consideration) can be higher in a taxable account over a tax-exempt account? I’m not getting this through my head right now. It seems to me that since a tax-exempt account will never have any taxes, the after-tax return is equal to the overall return for the portfolio. So in what situation can the taxable account have an after-tax return greater than the actual return?
when return is negative. with taxes the taxing authority shares some of the returns and risk, including negative returns.
if return = - 10%, and tax rate is 50%, after tax return is -5% whereas in tax exempt accounts that return would be -10%. you can use negative returns for tax credits in the future
does that make sense?
Ok. Got it. Thank you. Just takes someone to put the answer out there in a different way sometimes.