Tax drag

[Bopha99]

What is the best answer to of if in a question the rate of return is decreasing but n is getting longer for a tax advantaged account? The answer in Schweser says that tax drag increases because n increases. In a case like this, where they do not say by how much the rate decreases, should we go with the answer that tax drag increases as n increases?

 

[jamespeer]

I don’t think that’s a good answer that schweser has given….how can you quantify without knowing how much the return has decreased by or how long n has increased by? In this example the effects on the tax drag are unclear, you have one area which would increase tax drag and another which would decrease it. Does an increase in n always outweigh a decreasing rate of return? I can’t see the logic personally and can’t see how you can know with certainty without knowing the figures….

 

[Bopha99]

Yea…it was in one of their practice tests….argh!

 

[MrSmart]

What is tax advantaged? Do you mean tax drag in $ terms or % terms?
Deferred CG does not change the %drag, but annaul CG increases the %drag as n increases.