Hello all,
Happy studying.
Can someone kindly explain when it is best to recommend a tax deferred or tax exempt account to an investor>
if you expect that future tax rate to be higher than current tax rate, use tax exempt.
if you expect that future tax rate to be lower than current tax rate, use tax deferred.
there’s also regulatory constraints such as maximum allowed to be invested at an account or maximum holding periods.
If they’re equal then you would use a Tax-Exempt correct? Because the benefit is you’re going to be gaining tax alpha through tax-free compounding since you’re investing with after-tax dollars.
Nah, if future taxes will be equal there’s no difference if the same amount of funds can be deposited. Say though that a max contribution on both accounts is $500, than you can allocate more funds to the TEA than the TDA which is beneficial (i.e. if tax rate is 10%, you would put in $550 pre tax/$500 post tax into the TEA, but the TDA would still require only $500 gross that will be taxed on the way out).
Investment is $100, Tax rate 30%, pre-tax return is 6%
FV TEA = 100(1-.7)(1+.06)20 = 224.49
FV TDA = 100(1.06)20(1-.3) = 224.49
Your words are correct.
Your numbers are not.
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There you go.
Oops -
FV TEA = 100(1-.3*)(1.06)20 = 224.49.
Your contribution would also be 500/(1-.1)= 555.56 pre tax. 
Did I fix?