Tepper School of Business
Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing
"A central problem confronting investors in practice is how to efficiently invest the funds held in their taxable and tax-deferred savings accounts"
"Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing" received the 2004 TIAA-CREF Paul A. Samuelson Award for Outstanding Scholarly Writing on Lifelong Financial Security.
We investigate optimal intertemporal asset allocation and location decisions for investors making taxable and tax-deferred investments. We show a strong preference for holding taxable bonds in the tax-deferred account and equity in the taxable account, reflecting the higher tax burden on taxable bonds relative to equity. For most investors, the optimal asset location policy is robust to the introduction of tax-exempt bonds and liquidity shocks. Numerical results illustrate optimal portfolio decisions a function of age and tax-deferred wealth. Interestingly, the proportion of total wealth allocated to equity is inversely related to the fraction of total wealth allocated to equity is inversely related to the fraction of total wealth in tax-deferred accounts.
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