Q2A.i. Answer: Correct. I think it should be “incorrect”.
How could after-tax return in a TAXABLE account be any better (higher) than return a TAX-EXEMPT account, all else equal, even if (as in this case) there is a tax-loss harvesting advantage?
Does anyone know why the answer should be “correct”?
I believe that the point is that tax-exempt accounts are generally funded with after-tax dollars; you’ve already paid taxes.
You can’t get around paying taxes that easily. (Or, generally, at all.)
Both accounts are funded with after tax dollars in the question. My understanding is that, given the “substantial losses” Juan experienced, at least a portion of that can be offset by the tax loss function in his taxable account (since the guy is anticipating retirement, it’s fair to assume he has other income coming in the door to apply these losses to).
Thanks! Sorry should’ve been more clear. The two accounts are funded with after-tax dollars (given in question), as mildeng pointed out above as well. So the two accounts start off from the same ground. Is the answer overly simplistic (like some other places in the curriculum, intentionally)?
That’s what the answer said basically. But I don’t agree. When you have two accounts:
A. one in which SOME (or even ALL) of the future capital gains taxes can be offset by past losses - that’s the taxable account in this case
B. one in which ALL of the future capital gains will be exempt from taxes (i.e. no tax at all) - that’s the tax-exempt account.
Of course, account B should always be AT LEAST AS GOOD AS account A, all else equal. Correct?
they asked about return on the account. Given you encountered a loss on the Taxable account - the total amount of returns would be higher because of the losses.
Both had 100 beginning of period.
10$ earned in period.
and -5$ due to tax losses on taxable.
taxable = 15%, tax exempt has 10% returns.
What CPK said. In a vacuum your general theory holds, but considering the context of the question (or most real life context) it’s incorrect.