The question did not say how much rtn is from interests or capital gains. Actually it stated that the couple has low willingness to take risk so I would think most of the assets are in fixed income.
glacier88 Wrote: ------------------------------------------------------- > The question did not say how much rtn is from > interests or capital gains. Actually it stated > that the couple has low willingness to take risk > so I would think most of the assets are in fixed > income. It’s in a TDA so it is irrelevant. Again, did you read the tax chapter?
Sure. Can you reread Q1 of 2009 am exam? It is not in TDA.
Pension income from both Patricia’s company plan and the government pension plan is fully indexed for inflation. Briscoe expects a tax rate of 20% to apply to the Tracys’ withdrawals from the investment account. That is the definition of TDA had you read the tax chapter. Also this is probably the 10th thread on this. The issue has been argued to death including 2009 takers, 2010 takers etc.
This makes lot of senses now. Thanks so much. CFA III only for experts like you? Why didn’t they say it directly.
glacier88 Wrote: ------------------------------------------------------- > This makes lot of senses now. Thanks so much. > > CFA III only for experts like you? Why didn’t they > say it directly. Sorry, to be an A$$. It is just the board has been over this on numerous occasions over the last 2 months and in the last week it has been the same four questions over and over. Taxes, Cash and Carry and Swap from 2008, Rebalancing Corridor of International Bonds.
Just to note that sometime the return calculation is an IRR question and not necessary the required return ‘over the next year’. Example: 2008 Q1-D(ii)
Ok, I think I get this now. First things first, we need to adjust the income to be after tax to see if there’s a shortfall in living expenses or not. Then, determine if the future liabilities will be taxed or not. For example, charitable donations and college education are not taxed. Similarly, on the 2010 Q1 the future liability is not taxed at all because it represents a transfer of assets within a TDA. If it is a normal account (not tax deferred), keep all the liabilities/outflows before tax. If there is a contribution, do it after tax if the problem doesn’t give you an after tax number. Find the IRR/1 year return, add inflation, then divide the return by (1 - t). If it is a TDA, divide the future liabilities/outflows by (1-t). Then find the IRR/1yr return, and then add inflation to the answer. And while I’ve never seen a problem like this, if it was a TEA, you’d do the same process as a normal account but then don’t divide out (1-t).
Whoops. Did the morning session of Schweser’s Exam 2 in Book 2, and Q6 has me confused again. Here, we have a retiree and a listed after tax spending amount, portfolio value, tax rate (just says “tax rate”, doesn’t specify what it’s on), and inflation rate. We have no other information (the question is primarily a corner portfolio question). The answer says to take the spending rate, divide by (1-t), then add inflation. Note that this is essentially the same methodology as the TDA example above. I’m starting to see a pattern. On almost all of the questions I’ve seen, they add inflation AFTER tax. This is, of course, implicitly assuming that every account is a TDA. Whatever. My new strategy: apply inflation after tax UNLESS the question specifically references capital gains taxes. Note that essentially what you’re doing by applying inflation first is taxing the gain on the portfolio, not the income.
seemorr Wrote: ------------------------------------------------------- > Joe has $1 million. Joe expects to spend $100,000 > after-inflation annually. Expected inflation is > 5%. > > The required return is not 15% (10% spending plus > 5% inflation). The required return is 15.05%, > because the first year’s spending rises to > $105,000. Actually I think since he “expects” to spend $100k after-inflation, you don’t need to account for inflation again. So it would be ~15% if you did the additive approach. If this said he spent $100k last year and these expenses rise with inflation then you would have $105k.
mthmchris Wrote: ------------------------------------------------------- > I’m starting to see a pattern. On almost all of > the questions I’ve seen, they add inflation AFTER > tax. This is, of course, implicitly assuming that > every account is a TDA. > > Whatever. My new strategy: apply inflation after > tax UNLESS the question specifically references > capital gains taxes. Note that essentially what > you’re doing by applying inflation first is taxing > the gain on the portfolio, not the income. That makes sense to me. So basically the rule I would use then is: If TDA account, apply inflation last If taxable account, apply inflation first. If tax exempt account, apply inflation only.
LobsterBoy Wrote: ------------------------------------------------------- > mthmchris Wrote: > -------------------------------------------------- > ----- > > I’m starting to see a pattern. On almost all > of > > the questions I’ve seen, they add inflation > AFTER > > tax. This is, of course, implicitly assuming > that > > every account is a TDA. > > > > Whatever. My new strategy: apply inflation > after > > tax UNLESS the question specifically references > > capital gains taxes. Note that essentially > what > > you’re doing by applying inflation first is > taxing > > the gain on the portfolio, not the income. > > That makes sense to me. So basically the rule I > would use then is: > If TDA account, apply inflation last > If taxable account, apply inflation first. > If tax exempt account, apply inflation only. It’s important to note that is only if gains are taxed every year. If you have an account that pays deferred capital gains and is taxable, the account would not need to pay tax on inflation every year, similar to a TDA. Principal grows tax-deferred, income is taxed. Think about tax formula section and the IPS return requirement makes more sense.
Paraguay Wrote: ------------------------------------------------------- > It’s important to note that is only if gains are > taxed every year. > > If you have an account that pays deferred capital > gains and is taxable, the account would not need > to pay tax on inflation every year, similar to a > TDA. Of course you’re right, Paraguay. Looks like I stayed up too late last night studying.