A. While many studies have shown that the asset location decision depends upon specific assumptions about returns and tax rates in determining which location produces greater after-tax wealth in the end, there is a Journal of Financial Planning article that examines asset location by first adjusting the allocations to reflect their after-tax equivalents up front rather than merely adjusting at the end (since assets held in a retirement account essentially have a portion 'earmarked' for taxes). This in turn impacts not only how wealth compounds but also the "after-tax risk" of the investments (as losses in each account type also have different characteristics).
In the case of tax-deferred accounts, the government takes a portion of the entire account (principal and interest) but the taxpayer effectively enjoys the full growth rate on his/her after-tax share; by contrast, with a traditional investment account, the government effectively bears a portion of the risk (in the form of taxable losses). The study finds that when stocks in an IRA (with "full" risk) are compared to stocks in a brokerage account (with "shared" risk), the optimal allocation is virtually always to hold the stocks in the brokerage account, not merely for asset location tax efficiency, per se, but because the stocks-in-the-brokerage-account results in a more favorable mean-variance-optimized portfolio (because it effectively has a lower after-tax standard deviation).
Assume 30-year investment horizon, 30% ordinary income tax bracket, 15% capital gain tax bracket, 5% bond returns, and 8% stock returns in the form of capital gains that are realized each year. The after-tax ending wealth values for initial investments of $500,000 of pre-tax funds in TDAs and $500,000 of after-tax funds in taxable accounts are as follows:
Strategy 1: stocks in tax-deferred account, bonds in taxable account
Bonds in taxable account: $500,000 (1 + .05(1–0.3))^30 = $1,403,397
Stocks in TDA: $500,000 (1.08)^30* (1–0.3) = $3,521,930
Strategy 2: stocks in taxable account, bonds in tax-deferred account
Stocks in taxable account: $500,000 (1 + .08(1–0.15))^30 = $3,598,385
Bonds in TDA: $500,000 (1.05)^30*(1–0.3) = $1,512,680
Conclusion: it's better to put stocks in taxable account and bonds in tax-deferred account