When after-tax rebalancing deviation specified is +/-12.5% using a tax rate of 20%, how come the pre-tax range is therefore “12.5%*0.8=10%”? Shouldn’t it be 12.5%/0.8?
The original question is : a tax-exempt fund and a taxable fund both have targe asset allocation of 60% to equity, 40% to fixed income. Right now they both have 71% in equity and 49% in fixed income. Which one is out of rebalancing range?
Thanks in advance.
I guess my question, if put more accurately, would be:
How come after-tax rebalancing range is for taxable fund, while pre-tax range is for tax-exempt fund?
Somehow, the other way around is more intuitive to me?
More tax = more transactions costs = wider corridor width
less tax = less transaction costs = narrower corridor with
So the pre-tax range is narrower (10%) here than the after-tax range (12.5%)
After tax is used for a taxable fund because they are going to be taxed on their assets and returns, so the true allocation (post tax) might be different than how it looks pre tax. A tax exempt account isn’t going to be taxed down the road because the funds were already taxed on the way in. Therefore, you don’t need to adjust the allocation for taxes to be paid because it’s already reflected. Make sense?
Thank you. I understand the logic with the narrower and wider corridor. Just naming baffles me.
With the taxable account, the corridor should be wider. However, why should the range be name “after-tax range”? The range is applied to the pre-tax return of the taxable account, correct? Why shouldn’t it be called pre-tax range?
As to tax-exempt accounts, their narrower range is applied to their tax-exempt return, hence, already after tax… hence, shouldn’t it be pre-tax range? that’s where my confusion is.
But I guess I should stop confusing myself, and just memorize that my intuition is the wrong way around…lol…
Thank you for providing one useful way to look at the names, it helps me to memorize them. 
Was very confused by this as well so thanks a lot!