Asset Location for Retirement Savers
This paper uses data on actual returns on taxable bonds, tax-exempt bonds, and a small sample of equity mutual funds over the 1962-1998 period to compare two asset location strategies for retirement savers. The first strategy gives priority to holding equities, through equity mutual funds, in a saver's tax-deferred account, while the second strategy gives priority to holding fixed-income investments in the tax-deferred account. We consider high-income taxable individual investors who saved in each year and invested in one of actively-managed funds in our sample. Over the thirty-seven year span that we consider, such savers would have accumulated a larger stock of wealth if they had held their equity mutual fund in their tax-deferred account than if they had held the fund in a conventional taxable form. The explanation for this apparent contradiction of the often-stated bonds in the tax-deferred account' prescription has two parts. First, many equity mutual funds impose substantial tax burdens on their investors. This raises the effective tax rate on investing in equities through mutual funds rather than in a buy-and-hold personal portfolio. Second, taxable investors who wish to hold fixed income assets can do so by holding tax-exempt bonds as well as by holding taxable bonds. The interest rate differential between taxable and tax-exempt bonds suggests that the effective tax rate on fixed income investments may be lower than the statutory tax rate for high-income investors.
|Date of creation:||Nov 2000|
|Date of revision:|
|Publication status:||published as Gale, W., J. Shoven, and M. Warshawsky (eds.) Public Policies and Private Pensions. Washington: Brookings Institution, 2004.|
|Note:||AG AP PE|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
- Irwin Tepper, 1981. "Taxation and Corporate Pension Policy," NBER Working Papers 0661, National Bureau of Economic Research, Inc.
- R. Mehra & E. Prescott, 2010.
"The equity premium: a puzzle,"
Levine's Working Paper Archive
1401, David K. Levine.
- Poterba, James M., 1989.
"Tax reform and the market for tax-exempt debt,"
Regional Science and Urban Economics,
Elsevier, vol. 19(3), pages 537-562, August.
- James M. Poterba, 1989. "Tax Reform and the Market For Tax-Exempt Debt," NBER Working Papers 2900, National Bureau of Economic Research, Inc.
- Poterba, J.M., 1989. "Tax Reform And The Market For Tax-Exempt Debt," Working papers 514, Massachusetts Institute of Technology (MIT), Department of Economics.
- Bergstresser, Daniel & Poterba, James, 2002.
"Do after-tax returns affect mutual fund inflows?,"
Journal of Financial Economics,
Elsevier, vol. 63(3), pages 381-414, March.
- Dickson, Joel M. & Shoven, John B. & Sialm, Clemens, 2000.
"Tax Externalities of Equity Mutual Funds,"
National Tax Journal,
National Tax Association, vol. 53(n. 3), pages 607-28, September.
- John B. Shoven & Clemens Sialm, 1999.
"Asset Location in Tax-Deferred and Conventional Savings Accounts,"
NBER Working Papers
7192, National Bureau of Economic Research, Inc.
- Shoven, John B. & Sialm, Clemens, 2004. "Asset location in tax-deferred and conventional savings accounts," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 23-38, January.
- Joel M. Dickson & John B. Shoven, 1995. "Taxation and Mutual Funds: An Investor Perspective," NBER Chapters, in: Tax Policy and the Economy, Volume 9, pages 151-180 National Bureau of Economic Research, Inc.
- John B. Shoven, 1999. "The Location and Allocation of Assets in Pension and Conventional Savings Accounts," NBER Working Papers 7007, National Bureau of Economic Research, Inc.
- Tepper, Irwin, 1981. "Taxation and Corporate Pension Policy," Journal of Finance, American Finance Association, vol. 36(1), pages 1-13, March.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:7991. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.