Taxable and Tax-Deferred Investing: A Tax-Arbitrage Approach

41 Pages Posted: 13 Jun 2003 Last revised: 17 Jul 2008

See all articles by Jennifer C. Huang

Jennifer C. Huang

University of Texas at Austin - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2008

Abstract

We analyze an intertemporal portfolio problem with both taxable and tax-deferred retirement accounts. Using a tax-arbitrage argument, we identify conditions under which the optimal location decision (of where to place an asset) is separable from the allocation decision (of how much to allocate to each asset). Investors place highly taxed assets in the tax-deferred account to maximize the tax benefit, and adjust their taxable portfolios to achieve the optimal risk exposure. We show that the two-account problem can be reduced to a taxable-account-only problem. The results are robust to the possibility of postponing capital gains taxes, consumption and contribution decisions, and stochastic tax rates.

Keywords: Portfolio selection, tax-deferred accounts, tax-arbitrage

JEL Classification: G11

Suggested Citation

Huang, Jennifer Chunyan, Taxable and Tax-Deferred Investing: A Tax-Arbitrage Approach (March 1, 2008). McCombs Research Paper No. FIN-03-08. Available at SSRN: https://ssrn.com/abstract=395940 or http://dx.doi.org/10.2139/ssrn.395940

Jennifer Chunyan Huang (Contact Author)

University of Texas at Austin - Department of Finance ( email )

McCombs School of Business, B6600
Austin, TX 78712
United States
512-232-9375 (Phone)
512-471-5073 (Fax)

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