Taxable and Tax-Deferred Investing with the Limited Use of Losses
Author | : Marcel Fischer |
Publisher | : |
Total Pages | : 32 |
Release | : 2017 |
ISBN-10 | : OCLC:1305542152 |
ISBN-13 | : |
Rating | : 4/5 (52 Downloads) |
Book excerpt: We study the impact of the different tax treatment of capital gains and losses on the optimal location of assets in taxable and tax-deferred accounts. The classical result of Black (1980) and Tepper (1981) suggests that investors should follow a strict pecking-order asset location rule and hold those assets that are subject to the highest tax rate preferentially in tax-deferred accounts. We show that with the different tax treatment of realized gains and losses, only tax-efficient equity mutual funds are optimally held in taxable accounts whereas mutual funds with average tax-(in)efficiency are preferentially held in tax-deferred accounts.