[2] Although there is no academic support, it is common (now declining) to hear that assets with the highest effective tax rates should be prioritized in tax-shelter accounts.
Common advice is to locate tax-inefficient assets (such as bonds and real estate investment trusts) in the tax-advantaged accounts.
For the same reason, tax-exempt bonds, national savings certificates and other similar tax-privileged securities are best located in fully taxable accounts.
[7] Shoven and Sialm[8] provided an analysis of the decision point when income producing equities should be sheltered and optimal portfolio choice for each type of account.
Actively managed mutual funds or unit trusts may also prove to be better located in tax-sheltered vehicles, because equities held through financial intermediaries tend to be taxed more, due to high turnover, than individual equities held by an investor for the long term, who has the opportunity to plan the realization of gains and offset losses.
Siegel and Montgomery[9] demonstrate conclusively that taxes and inflation substantially dampen compound returns especially for equity investors.
Reed's re-balancing model rarely shows a difference of more than 10% after 30 years, unless withdrawals from tax-deferred accounts are at lower rates.
Amromin [11] argues that job income insecurity, penalties and restrictions on withdrawals from tax-deferred accounts explain why people are tax-inefficient with their investments.
Employers’ matches in defined contribution retirement plans and the structure of the social security system also play a part in driving low tax equity investments into sheltered accounts.
[15] An idealized example shows that over a 25-year interval, the difference between extreme asset location choices yielded a compounded 18% differential in return.