Tax question available, beginning, question, accounts

tarunajwani

A client has $100 in a taxable account and $100 in a Tax Deferred Account. Both accounts incurred losses at the end of the year. Tax harvesting is available. Had the investor placed more money in the taxable account from the beginning, would the volatility of the returns had increased or decreased? Also, would the after tax returns be higher or lower?

Makavelim3

volatility decreases, return increases.
^That would have been the correct one i think. I put down the wrong choice though

jonh

Volatility decreases and return decreases bcs you pay taxes.

scr879

my answer is return is the same but investment risk reduces …government shares investment risk.

Howd

You would have to assume that loss carry forwards are considered investment gain and that any income generated was less than the realized losses. I felt the same way but ultimately, I think it’s too much of a stretch to operate under those assumptions. I don’t think you’re wrong, Hank. But I don’t think that answer is going to fly
I believe in the Schweser notes one of the instructors said not to make assumptions. Answer questions with a “holding all other factors constant mentality”. If the rule is taxable accts increase tax drag and reduce Std Dev by (1-tax) you should answer questions as such.

jmh530

Systematic wrote:

bchadwick

^I dont get what you mean by that.
Honestly, I’m not sure that I’m right. I just think that I’m better off not making assumptions like the above. Even though I thought the same thing.

Iginla2010

I think you did right.

thecfawannabe

Can you not use the capital losses to offset the income gains? Or is it soley capital gains that can have losses applied to them?

Zestt

Can you not use the capital losses to offset the income gains? Or is it soley capital gains that can have losses applied to them?