My question is by reducing the weightage of tax exempt accounts how can returns be increased??

Question

Juan Pablo Alonso is now age 54 and anticipating retirement. Approximately 60% of his total 
investments are currently held in a tax-exempt account and 40% in a taxable account. 
Contributions into both accounts are made with after-tax income. In the tax-exempt account, 
withdrawals are entirely tax-free and without penalty. In the taxable account, Alonso now incurs 
a 20% tax on both income and realized capital gains. Realized losses can be used to offset 
current or future income and capital gains. 
Alonso experienced substantial losses in both of his investment accounts over the past year. He 
estimates that he will need to postpone retirement and questions whether his investments were 
structured optimally. Alonso meets with his advisor to discuss the effects of the tax regime on his 
portfolios. The advisor suggests that over the last year, both Alonso’s after-tax return and 
investment risk would have been higher if a larger proportion of assets had been held in the 
taxable account.

A.  Determine, based only on tax considerations, whether Alonso’s advisor is correct or 
incorrect with respect to Alonso’s: 
i.  after-tax return.
ii.  investment risk

Answer given :
Alonso’s after-tax return would have been greater than or 
equal to his actual return, all else equal, if a greater proportion
of his investments had been in taxable accounts. This is 
because he can use losses to offset other income or realized 
gains.

Sophie Macon · Answer

@Ashwin - while your example is fine, the answer is still right as you cannot look at wealth planning at one point in time only, it looks at the future too. And just because realized losses can't be used today, but it can used to offset future income and capital gains still. Same thing you'd done if it is your situation. You just carryforward those losses for future offsets, and by definition your future return would be improved vs. status quo.

Aswin · Answer

I totally agree that the losses can be used to offset future gains.. but even then for the next year the same 3 cases apply. I wud hve agreed with u if it was moved from a tax deferred or a taxed account to this but in our case the weightage of tax exempt accounts ll be reduced to over weight the taxed accounts. So this ll not increase the return ?? or am i missing something very silly in between?