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Using the Model to Determine the Best Investments to Place in A Tax-Deferred Account
This model is not designed to indicate what investments to buy.  But once your asset allocation has been determined and the investments for
each class of assets have been selected, the model indicates which investment is best placed in a tax-deferred account.
Various inputs must be made to provide the data to compute the anticipated after-tax returns in the four different types of accounts (taxable accounts,
traditional tax-deferred accounts, [NAME] IRAs or 401(k)s, and non-deductible IRAs.  The investment with the largest difference between the after-tax
return in the relevant tax deferred account and the taxable account is the best investment to be placed in the tax-deferred account.  (The relevant
tax deferred account is the type the taxpayer expects to use).
Yellow filled Cells are available for input.  Other cells are protected so the user does not inadvertantly type over the formulas.
Input Parameters
[NAME]:  The model has input areas for stock, bonds, real estate investment trusts, collectibles and generic assets.  These input areas
were established to incorporate the expected return parameters for each type of investment.  The input area for stocks also works well for
stock mutual funds and stock ETFs.  The generic asset requires the input of the tax rate applicable for each type of return.
OID and Market Discount Bonds:  The model computes the annualized rate-of-return for bonds purchased at their face value.  The
calculation of the annualized return on original issue discount (OID) bonds or market discount bonds is not handled by this model.  OID bonds require the
payment of tax on imputed interest not actually received.  This negative deferral of tax effectively lowers the return on these bonds below the
return on non-OID bonds with the same yield-to-maturity when held in a taxable account.  The investor can use the model on a non-OID bond
with the same yield-to-maturity and note that the OID bond will have a lower after-tax return than the non-OID bond.
Market discount bonds purchased require the investor to include in taxable income the difference between the purchase price and the face value
as ordinary income.  These bonds allow the deferral of the tax on the discount until the bonds are sold or mature.  Therefore, the after-tax return
on these bonds is higher (usually slightly) than a non-market discount bond with the same yield-to-maturity.
Anticipated Investment Returns:  Are input as yields (the return divided by the asset value).  For instance an investor may believe a stock
will return a dividend yield of 2% and an average annual appreciation of 8%, for a total return of 10% per year.
Tax Rates : The investor must estimate the tax rates applicable for various types of income. The maximum federal tax rates for 2013 are shown
for your reference.  State tax rates are not included in the rates..
Adding State Taxes to the Federal Tax Rate:  Investors may want to incorporate their state tax rate into the calculations.  Most states do
not allow the deduction of federal income tax, but for those who itemize, state income taxes are deductible on the federal return.  For an investor
who itemizes on the federal return and whose state does not allow the deduction of the federal tax, the computation of the total combined
federal and state taxes equals:  federal rate + state rate – (federal rate x state rate).  So for instance, a taxpayer with a 35%
federal rate and 5% state rate, would have a combined tax rate of:  35% + 5% - (35% x 5%) = 38.25%
Estimated Number of Years of Tax Deferral:  This is the number of years some or all of an investment's return is deferred in a taxable
account.  Bond interest is taxed annually, so 1 should be input (1 is effectively no deferral).  Stock appreciation is deferred until the stock is sold,
so the estimated years of tax deferral would be the estimated number of years until the stock is sold.  Mutual funds disclose their turnover rates.
The turnover rate is the inverse of the holding period. A mutual fund with an asset turnover rate of 25%, has a four years of tax deferral (1/25%).
This parameter does not affect the after-tax return in a tax-deferred account.
Estimated Number of Years until distribution from a tax-deferred account:  This is the number of years until the investment, if placed in a
tax-deferred account, would be expected to be distributed as a retirement account distribution.
Annualized after-tax rate-of-return:  The after-tax return is computed for the asset in a taxable account, traditional deductble IRA or 401(k),
Roth IRA or [NAME] 401(k), and non-deductible IRA.  Note that when a taxpayer enters the same ordinary tax rate at contribution and at retirement,
the traditional deductible tax-deferred account and the [NAME] have the same return, equal to the total of the pretax return elements.
The tax deduction of the traditional deductible tax-deferred account, and the exclusion from tax of distributions from [NAME] accounts
effectively exclude the investment returns from tax.  When the ordinary tax rates are different at the time of contribution and distribution, this is no
longer true.   The [NAME] IRA/401(k) will give a higher return than the traditional IRA/401(k) when the tax rate at contribution is lower than at the time
of retirement distribution.  The traditional IRA/401(k) will give a higher return than the [NAME] when tax rate is higher at the time of contribution than
at time of retirement distribution.