Hello,
Could you please explain the effect of capital gains tax on decumulations and accumulations(I.e final value, FV) of TDA and tax exempt account?
This is one of the new, major topics in wealth management for 2022 curriculum.
Thanks for your “brief” explanations.
same
When people withdraw money from their accounts (aka decumulation) and suppose they must choose between money located in a tax exempt or a taxable account/ tax deferred account:
1- The theory suggests that you should withdraw money first from your taxable account in order to profit from the higher compounding effect from your tax-exempt account before thinking about withdrawing it from your taxable account,
2- The practice shows that people living in progressive income tax regime countries prefer withdrawing money from their tax-exempt account first up to the maximum limit for lower tax rate before starting to withdraw it from the taxable account.
It makes sense if you consider that you locate the most tax efficient assets (i.e equity) in the least tax efficient account (i.e taxable accounts) because long term capital gains are generally less taxed than other asset classes.
To sum up if you make a killing with you long term holding in Tesla stock, you don’t care if it is located in you tax exempt, tax deferred or taxable account…you just want to keep it as long as possible. So you will first withdraw money where you don’t have your Tesla stock, that is from your tax-exempt account.