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Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing


  • Robert M. Dammon,

  • Chester S. Spatt,

  • Harold H. Zhang

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    • Robert M. Dammon and Chester S. Spatt are from Carnegie Mellon University. Harold H. Zhang is from the University of North Carolina at Chapel Hill. We thank Gene Amromin, Peter Bossaerts, Jerome Detemple, Doug Fore, Richard Green, Mark Kritzman, Robert McDonald (the editor), Peter Schotman, two anonymous referees, and seminar participants at the California Institute of Technology, Fields Institute (Toronto), London Business School, New York University, the University of Pittsburgh, the University of Southern California, the University of Utah, Washington University in Saint Louis, the 2000 Western Finance Association Meetings at Sun Valley, the Stanford Institute for Economic Policy Research Asset Location Conference, and the Center for Economic Policy Research Summer Symposium at Gerzensee, Switzerland, for helpful comments. The financial support provided by the Teachers Insurance Annuity Association-College Retirement Equities Fund is gratefully acknowledged.


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 as 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 in tax-deferred accounts.