AA: Why 30% tax adjustment for taxable account?

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AA: Why 30% tax adjustment for taxable account?

Postby marek » Fri Feb 01, 2013 11:47 pm

Where is 30%-20% reduction of the value of the taxable account coming from for the Tax Adjusted Asset Allocation? Should it be just reduced by the taxes on capital gain?

http://www.bogleheads.org/wiki/Tax-Adju ... Allocation

You should also reduce the value of your taxable account by about 30% if you are early in your career, and 20% if you are near or in retirement,
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Re: AA: Why 30% tax adjustment for taxable account?

Postby livesoft » Fri Feb 01, 2013 11:50 pm

Maybe the person who added that lives in California or NY and were including both state and federal income taxes?

I think one can come up with a number as low as 0% if they think about it carefully.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: AA: Why 30% tax adjustment for taxable account?

Postby grabiner » Sat Feb 02, 2013 12:01 am

marek wrote:Where is 30%-20% reduction of the value of the taxable account coming from for the Tax Adjusted Asset Allocation? Should it be just reduced by the taxes on capital gain?

http://www.bogleheads.org/wiki/Tax-Adju ... Allocation

You should also reduce the value of your taxable account by about 30% if you are early in your career, and 20% if you are near or in retirement,


Because you will pay tax on dividends every year, compounding for as long as you hold the funds, and then 15% tax on your capital gains when you sell. If you hold a fund which pays 2% per year in qualified dividends, for 30 years, you will lose 0.3% per year, for a total of 9%, and you will then lose another 15% of your gains, probably 12% of your fund value, when you sell. This is a 20% loss.

I changed the numbers to 25% and 15%; the old 30% and 20% numbers were correct under the assumption that the tax break on qualified dividends would be allowed to expire.
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