## Calculating Tax Efficient Amounts

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moneytobless
Posts: 51
Joined: Wed Feb 06, 2013 6:42 pm
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### Calculating Tax Efficient Amounts

I've read The Bogleheads' Guide to Investing, and this is my first post.

I have a 401k, Rollover IRA, Roth IRA, and taxable account. In each of them, I've placed both stocks and bonds.

After reading the book and some wiki pages, I'm moving funds to create a more tax-efficient portfolio.

One of the pages in the book shows the differences between placing assets in more appropriate accounts.

Stocks in Tax Deferred Bonds in Taxable
Initial Investment \$50,000.00 \$50,000.00
Value After 30 Years \$872,470.11 \$232,077.55
Taxes at Distribution \$218,117.53 \$0.00
Final Value \$654,352.59 \$232,077.55

Bonds in Tax Deferred Stocks in Taxable
Initial Investment \$50,000.00 \$50,000.00
Value After 30 Years \$380,612.75 \$820,490.16
Taxes at Distribution \$95,153.19 \$100,499.00
Final Value \$285,459.56 \$719,991.16

This assumes a 10% return on stocks, 7% return on bonds, 1.5% dividend yield, 15% capital gains and dividend tax rate, and 25% income tax rate.

I'm a bit of a math nerd, and like to know how one arrived at the numbers.

Using Excel and the FV function, I was able to calculate the final values for all four scenarios except the Stocks in Taxable. I understand that the interest rate used was 9.775% (.09775) to account for the annual taxation of dividends.

But how do you arrive at the taxes owed amount of \$100,499.00? I assume that the 15% tax rate would be applied to the difference between the final value of \$820,490.16 and the beginning value of \$50,000.00. This is \$770,490.16, and 15% of that is \$115,573.52, not \$100,499.00.

I'm guessing that I didn't account for dividends, but still can't figure this out after doing all sorts of calculations.

How do you arrive at the taxes owed amount of \$100,499.00?

grabiner
Posts: 22048
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

### Re: Calculating Tax Efficient Amounts

If you hold stocks in a taxable account, your basis includes the initial amount and the reinvested dividends. In this example, the stock return is 9.775% annually, and 1.275% reinvested dividends, so 8.5/9.775 of the gains are taxed. That fraction of the gains is \$669,991.44, and the tax due on it is \$100,498.72; the 28-cent difference is probably the result of cents being dropped in an intermediate calculation.
David Grabiner

moneytobless
Posts: 51
Joined: Wed Feb 06, 2013 6:42 pm
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### Re: Calculating Tax Efficient Amounts

Excellent. Thanks for the clear explanation David!