The Importance of a Tax-Efficient Withdrawal Strategy in Retirement

Retirees often rely on conventional wisdom in choosing a withdrawal strategy in retirement. Conventional wisdom essentially says to withdraw from your most taxable accounts first. Accordingly, conventional wisdom says to first withdraw from taxable accounts, then from tax-deferred accounts (such as 401(k)s and regular IRAs), and then finally to withdraw from tax exempt accounts (such as Roth IRAs).

While conventional wisdom may be the appropriate strategy in some cases, the failure to consider the strategic and possibly simultaneous withdrawal from a mixture of  account types can have a tremendously negative impact on your retirement longevity and lifetime portfolio value. By considering alternative strategies that focus of tax-efficiency over the long term, retirees can possibly increase their retirement longevity by five to ten years, and increase their lifetime portfolio value by hundreds of thousands of dollars. This can mean longer retirement, the freedom to spend more in retirement, and/or leaving a greater inheritance for your loved ones.

Perhaps the conventional wisdom on withdrawal strategies became conventional because of its simplicity. In contrast, crafting the optimal withdrawal strategy is complex. It involves balancing income tax brackets, social security strategies, cost basis of taxable accounts, the effect of increased income of the taxation of Social Security benefits and Medicare premiums, and other considerations. But the reward for engaging in the more complex analysis can be dramatic.

Please feel free to contact us for a further discussion on how we can provide you with a cost-effective and customized tax efficient withdrawal strategy that can greatly increase the longevity and value of your lifetime retirement portfolio.