Discuss why Wacho’s recommended decumulation strategy is the more tax-efficient strategy.

Wacho and Ka next discuss tax loss harvesting and tax lot accounting for one of Ka’s other accounts. Ka has recently built a position in shares of Hachiko Corporation; Ka’s purchase history is presented in Exhibit 1.

Today is 23 August 20X3, and Ka sells 200 shares. The current share price is \($124.00\).
The tax rate for long-term holdings is 25%, and the tax rate for short-term holdings is 40%.
A holding period of less than six months is considered short-term for tax purposes. Ka has chosen HIFO (highest in, first out) as his tax lot accounting method.

Private wealth manager Udaga Wacho is discussing a decumulation strategy with client Dogenza Ka. The strategy involves two of Ka’s accounts, a taxable account and a tax-exempt account, and will allow Ka to withdraw \($200\),000 each year. Both accounts have a current balance of \($1\) million.
Ka asks Wacho if he should withdraw funds from the taxable account first until it is depleted prior to withdrawing from the tax-exempt account, or vice versa. Wacho reviews the accounts to make a recommendation; he assumes a fixed, pre-tax rate of return of 10% for both accounts and that earnings in the taxable account are taxed at a fixed effective rate of 25%. Wacho recommends that Ka withdraw funds from the taxable account first until it is depleted prior to withdrawing from the tax-exempt account.

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EXHIBIT 1 Tax Lot Purchase History of Hachiko Corporation Tax Lot Shares Purchase Date Acquisition Price ($) A 200 July 19, 202 122.00 B 200 Nov. 17, 20x2 135.00 C 200 May 9, 20x3 129.00