Practical Applications of Static and Dynamic Tax Diversification of Withdrawals from Multiple Individual Retirement Accounts

Abstract

<h3>Practical Applications Summary</h3> In <b><i>Static and Dynamic Tax Diversification of Withdrawals from Multiple Individual Retirement Accounts</i></b> from the Fall 2018 issue of <b><i>The Journal of Retirement</i></b>, author <b>Ganlin Xu</b> (of <b>GuidedChoice</b>) constructs a framework to help investment professionals find the most tax-effective way for clients to fund their retirement. He focuses on retirees who have assets in both traditional and Roth IRAs. Financial advisors often recommend a standard sequence of withdrawals from different types of accounts, but the author shows that approach does not take into account market conditions and retirees’ changing tax circumstances. He finds that taking withdrawals first from a traditional IRA saves taxes in an up market, taking withdrawals first from a Roth IRA saves taxes in a down market, and taking simultaneous withdrawals from both a traditional and a Roth IRA saves more taxes overall. He then provides easy-to-use tables showing the tax-optimal withdrawal combinations from traditional and Roth IRAs. In general, single filers save more in taxes by withdrawing more, earlier from Roth IRAs, married joint filers save more by simultaneously withdrawing equal amounts from traditional and Roth IRAs, and married joint filers with high IRA balances save more by taking most of their withdrawals from traditional IRAs. <b>TOPICS:</b>Retirement, statistical methods, legal/regulatory/public policy, wealth management