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Opinion: Tax-efficient retirement income strategies for peace of mind

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Approximately 10,000 baby boomers – those born 1946-64 – retire every day in the United States. By 2031, the youngest boomers will reach full retirement age, and many will step away from their familiar career of 40-plus years into a land of retirement uncertainty.

While everyone faces increasing complexity in today’s ever-changing world, retirees especially can benefit from a financial plan to help provide some peace of mind. Specifically, having a plan to generate the retirement income from your investment portfolio in a tax-efficient manner could save headaches during your golden years.

There are a variety of ways to withdraw from your investment portfolio. Some strategies focus on utilizing tax diversification – having a variety of retirement account types including tax-deferred individual retirement or 401(k) accounts, tax-free or Roth accounts and after-tax or taxable accounts. Others recommend a bucket approach – a strategy based on holding different buckets of money, each one invested with a specific segment of your retirement in mind. The buckets generate income based on when it’s needed – short, middle or long term. Regardless of the strategy type, they all require a long-term perspective to manage your taxable income and associated costs.

The conventional approach that many individuals take at retirement is drawing income from the after-tax taxable accounts to fund their spending first. The taxable account is typically a brokerage account with annually taxable interest, dividends and potential capital gains. This approach has been called the traditional or sequential withdrawal strategy. A benefit is you can spend down the least tax-efficient account first while allowing your tax-deferred retirement accounts to compound and grow as long as possible. A concern with this strategy is that, upon depletion of the taxable account, full distributions from your tax-deferred retirement accounts later in retirement can drive up your taxable income.

There are reasons to manage your taxable income in retirement. Both Social Security and Medicare have income thresholds that will increase your costs if income exceeds a particular threshold and there are additional reasons to put a retirement income strategy in place. Up to 85% of your Social Security benefit amount could be taxed based on your income level. Medicare premiums are subject to an additional surcharge amount based on your income level. A surcharge, called the income-related monthly adjustment amount, is based on your modified adjusted gross income filed on your tax return two years prior. Therefore, not being mindful of your taxable income today could impact income taxes this year and Medicare costs in future years.

Recognizing that a conventional withdrawal strategy may boost taxable income when a taxable account has been depleted, the next strategy to consider is a blended withdrawal strategy. By intentionally taking distributions from both taxable and tax-deferred accounts, the taxable account could last longer. It also allows you to manage income by taking distributions from your tax-deferred accounts while targeting a lower tax bracket, 10%-12%, and/or avoid the Medicare income-related surcharge.

The next evolution of a blended strategy considers conversions of some of the taxable income generated from the tax-deferred account distributions into a tax-free account for further compounding in retirement. In practice, the systematic Roth conversion strategy draws from both a taxable account and a tax-deferred account to cover your spending needs, then makes an additional distribution from your tax-deferred accounts to fill the current tax bracket and convert that amount to after-tax Roth savings. This strategy allows you to better manage your income throughout retirement by providing you with tax diversification across accounts.

There are several things to consider before deciding which tax-efficient withdrawal strategy is appropriate for you. Fundamentally, the strategy you choose should align with your financial goals and personal aspirations. Ask yourself, “Does this strategy allow me to leave the legacy I want?”

Other things to consider:

  • Other retirement income.
  • Investment portfolio size and tax diversification.
  • Expected spending.
  • Your health and expected lifespan.

The important thing to keep in mind is to work with a trusted adviser to develop a tax-efficient withdrawal strategy that is right for you. They can help assess your unique circumstances and recommend the best strategy for your needs.

Travis Liles is a senior managing adviser for FORVIS LLP. He can be reached at


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