Tax Deferred Account

[FrankCFA]

Sam Conner and Bill Pope live in different countries. In Conner’s country, there is a light capital gain tax regime. In Pope’s country there is a heavy capital gain tax regime. They both are building diversified portfolios that hold non-dividend-paying growth stocks, dividend-paying stocks, and coupon-paying bonds. They both have a buy-and-hold strategy. Which, if either, would probably benefit the most from a tax-deferred account (TDA)?

A)
Conner would benefit more than Pope.

B)
Pope would benefit more than Conner.

C)
Neither would benefit because tax-deferred accounts do little to enhance the returns of diversified portfolios.

 

[Analyst1988]

I think the answer should be B. SInce tax deferred accounts basically just defer taxes, the benefit depends on wether the future tax rate is expected to be lower or higher than prevailing rates. Since Popes country has a high tax currently, there is more probability of future tax rate to be lower thus benefitting Pope.
Do you have the answer to the question?

 

[FrankCFA]

Answer: A
Curve ball…
Kaplan Explanation:
Conner would benefit more. In a light capital gain tax regime, dividends and interest do not receive favorable tax-treatment. There would be an advantage to having them in the TDA. In the heavy capital gain tax regime, interest and dividends receive tax advantages.