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Asset Allocation and Asset Location: Household Evidence from the Survey of Consumer Finances
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Abstract
The rapid growth of assets in self-directed tax-deferred retirement accounts has generated a new set of financial decisions for many households. In addition to deciding which assets to hold, households with substantial assets in both taxable and tax-deferred accounts must decide where to hold them. This paper uses data from the Survey of Consumer Finances to assess how many households have enough assets in both taxable and tax-deferred accounts to face significant asset location choices. It also investigates the asset location decisions these households make. In 1998, 45 percent of households had at least some assets in a tax-deferred account, and more than ten million households had at least 25,000inbothataxableandatax−deferredaccount.Manyhouseholdsholdequitiesintheirtax−deferredaccountsbutnotintheirtaxableaccounts,whilealsoholdingtaxablebondsintheirtaxableaccounts.Mostofthesehouseholdscouldreducetheirtaxesbyrelocatingheavily−taxedfixedincomeassetstotheirtax−deferredaccount.Assetallocationinsideandoutsidetax−deferredaccountsisquitesimilar,withaboutseventypercentofassetsineachlocationinvestedinequitysecurities.Fornearlythreequartersofthehouseholdsthatholdapparentlytax−inefficientportfolios,ashiftoflessthan10,000 in financial assets can move their portfolio to a tax-efficient allocation. Asset location decisions within IRAs appear to be sensitive to marginal tax rates; we do not find evidence for such sensitivity in other tax-deferred accounts.