Rethinking Asset Location - Between Tax-Deferred, Tax-Exempt and Taxable Accounts
August 28, 2013
The Asset Location (AL) decision determines which of the assets owned should be held in which account-type in order to maximize the possible benefits from those accounts.
This paper argues against AL practices that
a) phrase general rules in terms of asset-types, instead of in terms of the metrics that decide the issue,
b) produce rules for AL that are shown to fail to maximize wealth,
c) ignore the impact of a change in tax rates between contribution and withdrawal, and
d) make the objective of AL to maximize utility, when investors assume AL decisions maximize wealth.
A general model of the accounts is created that calculates their benefits and deconstructs the total benefit into its two sources. The two sources of benefits are analyzed to develop AL rules.
An AL procedure is illustrated to deal with all situations. The metrics used for ranking assets are the same calculations that deconstruct the accounts' benefits. The procedure is extended to include the Asset Allocation decision.
Number of Pages in PDF File: 16
Keywords: asset location, asset allocation, tax-exempt, tax-deferred, taxes and retirement savings, portfolio selection, Roth IRA, IRA, RRSP, TFSA
JEL Classification: G11working papers series
Date posted: August 29, 2013 ; Last revised: October 3, 2013
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