Rethinking Asset Location - Between Tax-Deferred, Tax-Exempt and Taxed Accounts
21 Pages Posted: 29 Aug 2013 Last revised: 8 Jun 2023
Date Written: August 29, 2013
Abstract
The Asset Location decision determines which of the assets owned should be held in which investment account (tax-deferred, tax-exempt or taxed) in order to maximize the tax-reduction benefits of those accounts, and to maximize ending wealth. This paper questions whether asset location efforts are worth the effort.
The benefits created by tax-shelters are modelled and calculated to be 1) for both tax-shelters equally, the benefit from permanently tax-free profits earned on after-tax savings, and 2) the bonus/penalty from a change in tax rates between contribution and withdrawal for tax-deferred accounts. The industry-wide beliefs are disproved.
Assets’ attributes that increase those benefits are identified. The Time factor is shown to be critical, although not considered in existing literature. Rules of thumb based on assets’ attributes, instead of asset class, are listed. Common rules are rejected. A spreadsheet with what-if inputs allows for testing personal situations.
The literature to combine the asset location and allocation choice into one combined decision is disputed.
Keywords: asset location, asset allocation, tax-exempt, tax-deferred, taxes and retirement savings, portfolio selection, Roth IRA, IRA, RRSP, TFSA
JEL Classification: G51, H31, D14, J26, H24
Suggested Citation: Suggested Citation