Best Asset Location for a TIPS Ladder

Abstract

Tax treatments vary across assets and account types. The literature on asset location developed in response to these challenges. The goal is to find the best location for each asset in the portfolio, defined as the account type where it will receive the most favorable tax treatment. Given multiple assets, such as stocks and bonds, and multiple account types, such as a brokerage account versus a 401(k) plan, a joint solution must be pursued: each asset has to be located such that the overall tax treatment is the most favorable that can be obtained, net, across assets and accounts. This paper develops the best location for a ladder of Treasury Inflation Protected Securities when the portfolio also contains stocks.

Keywords: TIPS, bond ladder, income tax, Original Issue Discount, RMD

JEL Classification: D14, E31, G51