Abstract
We present a life cycle model with diversification and tax-deferred investment opportunities. We find that investors should locate most of their taxable equities in the taxable brokerage account and taxable bonds in the tax-deferred retirement account irrespective of bequest motives when borrowing is not allowed. But in the presence of substantial diversification opportunity and limited borrowing ability, diversification may drive the location decision depending on the investors' tax-deferred wealth level. We disentangle the impact of borrowing constraint from the impact of diversification, and show explicitly when diversification may affect location decision. Our results provide specific guidance for the retirement savers.
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