Charta is on Google Play: practise on the go. Get the app
Charta

Explain and propose retirement wealth planning that takes account of legal, tax and cross-border issues

CFA® Level III · Private Wealth Pathway · Investment Planning · L3.PW.4.c

The idea

Retirement accounts differ in when tax is paid. With a deductible, tax-deferred account, contributions are made pre-tax and withdrawals are taxed: FV = (1 + r)ⁿ × (1 − tₙ). With a tax-exempt account, contributions are taxed and withdrawals are free: FV = (1 − t₀) × (1 + r)ⁿ. They are equal when today's rate equals the rate at withdrawal; for 100 at 6% over 20 years, a 30% rate now and 20% later gives 256.57 deferred versus 224.50 exempt. Legal planning covers beneficiary designations, powers of attorney and incapacity. Jurisdiction matters when a retiree moves: tax residence governs how withdrawals are taxed. The trap is choosing an account type without estimating the future tax rate.

Formulas

Tax-deferred retirement account

FV = (1 + r)ⁿ × (1 − tₙ)

r
the pre-tax return
n
the years until withdrawal
tₙ
the tax rate when the money is withdrawn

Contributions go in before tax and withdrawals are taxed. It beats a tax-exempt account when the rate at withdrawal will be lower than today's: 100 at 6% for 20 years with 20% at withdrawal gives 256.57.

Tax-exempt retirement account

FV = (1 − t₀) × (1 + r)ⁿ

t₀
the tax rate today, on the money contributed
r
the pre-tax return
n
the years until withdrawal

Contributions are taxed now and withdrawals are free. The two accounts are equal when t₀ equals the rate at withdrawal: 100 at 6% for 20 years taxed at 30% now gives 224.50.

In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.

Take the free diagnostic →

More in Investment Planning