Asset Location; A Generic Framework for Maximizing After-Tax Wealth

Daryanani, Gobind; Cordaro, Chris
January 2005
Journal of Financial Planning;Jan2005, Vol. 18 Issue 1, p44
Academic Journal
• This paper addresses the placement of asset classes in a client's taxable or tax-advantaged accounts, commonly referred to as the asset location problem. • We describe a generic framework for finding the optimal location for multiple asset classes. The proposed location approach (referred to as the "difference approach") is shown to provide an average 20 bps per-year, after-tax return benefit over simply using identical allocations in the multiple accounts with different characteristics. • Optimal location is shown to depend on the client's particular financial profile (taxes, cash flows), prevailing tax laws, and on the tax characteristics of the asset classes in their portfolio. • The methodology presented is generic in that it can be extended to any number of asset classes and adapted to address other account types such as Roth IRAs, annuities, and trusts. • The paper first describes the difference approach, and then evaluates the sensitivity of the proposed locations to the client's financial profile parameters and prevailing tax laws. Next the sensitivity to the asset class parameters is discussed. General rules and some guidelines that apply to most clients are then summarized. • One of the key metrics for establishing location is after-tax end-wealth, which depends on some combination of return and tax efficiency. • The article will be of interest to planners who are looking for opportunities to enhance investment performance for their clients with tax efficient investment management techniques. Planners who already use tax-toss harvesting and rebalancing techniques for their clients will find this article on asset location techniques to be particularly useful. INSET: Executive Summary.


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