After-tax returns are the actual returns an investor receives after accounting for taxes on investment income and capital gains.
Which of the following is the best definition of after-tax return?
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Select an option above to see an explanation here.
A) This is the definition of pre-tax return. B) This is the definition of real return. C) This is the correct definition of after-tax return. D) This is the definition of total return.
Which of the following accounts is NOT subject to taxes on investment income and capital gains?
A) Taxable accounts are subject to taxes on investment income and capital gains. B) Tax-deferred accounts postpone taxes on investment income and capital gains until they are withdrawn. C) Tax-exempt accounts are not subject to taxes on investment income and capital gains. D) Tax-exempt accounts are not subject to taxes on investment income and capital gains.
What is the primary goal of tax-efficient investing?
A) This is related to real return, not tax-efficient investing. B) This is the correct definition of tax-efficient investing. C) This focuses on pre-tax returns, not after-tax returns. D) This is an unrealistic goal and not the primary focus of tax-efficient investing.
In the late 1990s, many investors focused solely on pre-tax returns and ignored the impact of taxes on their investment performance. As a result, they experienced lower after-tax returns than expected, leading to a greater emphasis on tax-efficient investing strategies in the following years.
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Example Series 65 Example Practice Question
An investor holds two stocks in their portfolio, one with a pre-tax return of 10% and the other with a pre-tax return of 8%. However, the first stock generates significant taxable income, while the second generates tax-free income. After accounting for taxes, the investor may find that the second stock provides a higher after-tax return, making it a more attractive investment.
To maximize your wealth, don't just look at gains, consider the taxes and after-tax remains.
After-tax return = (Pre-tax return * (1 - Tax rate))
1. Calculate the pre-tax return: If an investment earns $10,000 and the initial investment was $50,000, the pre-tax return is ($10,000 / $50,000) = 0.2 or 20%. 2. Assume the investor's tax rate is 25% 3. After-tax return = (0.2 * (1 - 0.25)) = 0.2 * 0.75 = 0.15 or 15%.