A finished FIN-451 Topic 6 asset location tax drag analysis example, cutting annual tax drag by relocating bonds, then showing the move shifts the after-tax allocation toward stocks. Searches like "fin 451 topic 6 assignment example", "fin451 topic 6 sample" and "fin-451 topic 6 example" land here.
What a finished FIN-451 Topic 6 asset location tax drag analysis looks like
The household holds 500,000 in a taxable account, 400,000 in a traditional IRA and 100,000 in a Roth IRA, with a 60/40 target, every figure illustrative. The stock fund yields 1.5 percent in qualified dividends taxed at 15 percent, and the bond fund 4.5 percent taxed as ordinary income at 24. Held pro rata, the taxable account generates about 2,835 of tax a year. Placing all 400,000 of bonds in the traditional IRA and stocks in the other two accounts cuts that to 1,125, a saving of 1,710 a year before growth. The analysis then values the IRA after the tax still owed on it: at an assumed 22 percent withdrawal rate it is worth about 312,000, so the located portfolio is closer to 66 percent stocks after tax.
How a FIN-451 Topic 6 example is structured
The analysis moves from accounts to placement to consequences. It opens by listing each account, its tax treatment in general terms and its balance, and restates the household's 60/40 policy. A drag table estimates the yearly tax each asset class generates in a taxable account, using rates the case assigns and labeled as illustrative rather than current. The placement section compares pro rata holdings with a located arrangement and totals the tax for each. A Roth paragraph explains why the stocks with the highest expected growth go there, where growth and qualified withdrawals are generally untaxed. The after-tax section discounts the traditional IRA for its embedded tax and restates the allocation on that basis. A rebalancing paragraph notes that trims can happen in the Roth without tax. The analysis closes by choosing whether to accept the higher effective stock weight or adjust the targets.
Drag estimated by asset class
Bond interest taxed as ordinary income drags far harder than qualified stock dividends, so where the bonds sit decides most of the household's yearly tax.
Pro rata against located
Holding 60/40 in every account costs about 2,835 a year in tax, while moving all bonds into the traditional IRA costs about 1,125.
Growth placed in the Roth
The Roth holds stocks because its growth and qualified withdrawals are generally untaxed, which makes it the most valuable home for the highest expected return.
An IRA valued after its tax
A traditional IRA carries tax not yet paid, so 400,000 of bonds there is worth about 312,000 to the household at the assumed withdrawal rate.
Risk that relocation adds
Measured after tax, the located portfolio holds about 66 percent stocks, nearly six points above the policy target, and the analysis states this openly.
Trims made in the Roth
After a stock rally the Roth can sell without realizing taxable gains, so the located design keeps a tax-free place to rebalance.
Where marks go in FIN-451 Topic 6
Analyses that report the tax saving and never ask what location did to risk lose the most, because a dollar in a traditional IRA is not a dollar the household owns outright. Placing bonds in the taxable account and stocks in the IRA, on the theory that growth should always be sheltered, reverses the drag arithmetic under the case's assumptions. Papers that quote current brackets or dividend rates as fixed date the work and ignore that the household's own rates will change. Treating the Roth and the traditional IRA as interchangeable misses the difference in what each owes at withdrawal. Location recommended without a rebalancing plan can force taxable sales of appreciated stock the first time weights drift. Tax savings projected over decades, with no word on assumptions, present a guess as a result.
Get a FIN-451 Topic 6 example written to your instructions
Send the FIN-451 Topic 6 instructions and the rubric listed in your classroom, with the household accounts your section provides. We write a custom example to them, with tax drag estimated by asset class, pro rata and located arrangements compared, the traditional IRA valued after its embedded tax and the effect on risk stated, in 24 to 48 hours. The first one is free.
FIN-451 Topic 6 questions, answered
What is asset location?
Deciding which accounts hold which assets, as distinct from asset allocation, which decides how much of each to hold. Because taxable, tax-deferred and tax-free accounts treat income differently, placing heavily taxed assets such as bond funds in deferred accounts can lower the household's yearly tax without changing its overall mix. The saving depends on tax rates, yields and the household's future withdrawal rate, all of which change.
Why does the IRA count for less after tax?
Because withdrawals from a traditional IRA are generally taxed as ordinary income, so part of its balance will go to tax eventually. Valuing it at the withdrawal rate the case assumes, 400,000 becomes about 312,000 of spendable money. Measured that way, the located portfolio holds more stock relative to bonds than its nominal balances suggest, which is why the analysis restates the allocation on an after-tax basis.
Should I move my own bonds into my IRA?
The analysis cannot answer that for a real household. Its balances, yields and tax rates were set for illustration, so that the drag and the risk shift would both be visible, and actual rules, brackets and account options change. Location decisions depend on current tax law, future withdrawal plans and state taxes. It is FIN-451 coursework describing tax effects at a general level; real accounts deserve a tax professional's review.