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Michael E. KitcesMSFS, MTAX, CFP®, CLU, ChFC, RHU, REBC, CASL

Partner. Director of Research, Pinnacle Advisory Group

Publisher. The Kitces Report, www.kitces.com

Blogger. Nerd’s Eye View, www.kitces.com/blog

Twitterer. @MichaelKitces, www.twitter.com/MichaelKitces

Tax-Efficient Withdrawal Strategies In Retirement10.21.2021 | FPA Northeastern Ohio

Handouts/Additional Materials at: kitces.com/FPANEO21

@michaelkitcesHandouts/Materials: kitces.com/FPANEO21

Setting A Retirement Spending Plan

• Fundamentals of a Retirement Spending Plan

ImplementPortfolio

Make AnnualAdjustments

Set Goals& Assess

Risk Tolerance

CreateInvestment Policy

Statement (IPS)

EstablishWithdrawal

Strategy

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Setting Withdrawal Strategy

• Key Elements of setting a Withdrawal Strategy:

Coordinating Portfolio Implementation (Asset Location)

Annual Adjustments

Account Sequencing (and Finding Tax Equilibrium)

Identifying Cash-Flow Sources (and Costs)


Setting Withdrawal Strategy

How will you generate

income for us from our

retirement portfolio…?

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Four Pillars of Retirement Income

Bond Coupons Dividends Capital Gain Principal


Generating Retirement Paychecks

• Option 1: Invest for “Income”• Buy the yield you need to succeed, and spend it as received!

• Bond interest

• Stock dividends

• REITs & MLPs?

• …But don’t stretch too far for yield?

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• Option 2: Capital Gains Top-Up• Invest in a balanced portfolio of stocks & bonds

• Sweep interest & dividends to cash

• Distribute cash as needed

• Liquidate capital gains (or principal) to top up the cash

• …But requires more year-by-year monitoring to manage!



• Option 3: Fully-Invested Total Return• Invest in a diversified growth-oriented portfolio

• Reinvest dividends & interest as paid

• Remain fully invested

• Liquidate to generate cash as needed

• …But requires low transaction costs and is not conducive to

client psychology!?

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• Strategies to generate retirement paychecks

Approach

Dividends & Interest

Capital Gains

Cash

Common Investments

Primary Risk(s)

IncomeFocused

Paid As Received

N/A

N/A

Bonds, Dividend-PayingStocks, REITs, MLPs

Stretching For Yield

Capital Gains Top-up

Paid In Cash

Sold Periodically toReplenish (Top-Up) Cash

Accumulates forDistributions

Balanced Portfolioof Stocks & Bonds

Must BeAnnually Managed

Fully-InvestedTotal Return

Reinvested As Paid

Liquidated As Needed

Fully Invested

Diversified GrowthCentric Portfolio

Requires LowTransaction Costs


Retirement Account sequencing

• Coordinating Across Retirement Accounts

• Which do you liquidate first…?

Taxable InvestmentAccounts

Pre-Tax RetirementAccounts (IRA & 401(k))

Tax-Free RetirementAccounts (Roth)

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• Traditional Approach: Retirement Accounts First

Assumptions: $750,000 brokerage, $750,000 IRA,

$80,000/year withdrawal

MK1



• Alternative Approach: Taxable Accounts First

Assumptions:$750,000 brokerage, $750,000 IRA,


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Slide 11

MK1 Michael Kitces, 11/20/2018

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10% Bracket

12% Bracket

22% Bracket


• Tax Bracket Management

TaxableIncome

$120,400

SocialSecurity

$30,000

Non-TaxableS.S. Portion

($4,500)

PortfolioIncome

$20,000

Exemptions/Deductions

($25,100)

IRAWithdrawal

$100,000



• Split Approach: Draw Half From Each Account



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• Comparing Strategies…




Partial Roth Conversions

• Systematic Partial Roth Conversions

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• Partial Roth Conversions (filling 12% bracket)





• Comparing Strategies…



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• Filling The Lower Tax Bracket Buckets


Partial RothConversion

Converting ‘TooMuch’ To Roth?Keep Deferring

Traditional


• Finding Tax Equilibrium

TaxEquilibrium

Time

Tax RateNow

Tax RateIn the Future

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Setting tax Equilibrium

• Finding Tax Equilibrium

10% Bracket12% Bracket

22% Bracket

24% Bracket

32% Bracket

35% Bracket

37% Bracket

Mass Affluent - $80,250

Millionaires - $326,600

Ultra-HNW - $622,050


$1,320,000

$27,000 RMD

Assuming 24% Tax Bracket

Maintaining tax Equilibrium

• Handling The Onset Of RMDs

Assets Liabilities

Taxable Brokerage Account $750,000

Total Assets $1,500,000

Embedded IRA Tax Liability $180,000

Total Liabilities $180,000

Net Worth $1,320,000

Traditional IRA $750,000$723,000

$770,520

$1,493,520

$173,520

$173,520

$86,760

$86,760

$1,407,840

12%

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Overlaying Asset Location

• The Impact Of Expected Return

• Tax-deferred compounding growth matters more when

there is more growth rate to compound tax deferred!

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

3% 5% 10%

Po

rtfo

lio V

alu

e (N

et o

f Ta

xes)

Expected Gross Returns

Taxable Tax-Deferred


• The intersection of tax efficiency & expected return

0%

2%

4%

6%

8%

10%

12%

Most Tax Efficient Least Tax Efficient

Exp

ecte

d R

etu

rn

Tax Efficiency

Brokerage Account

Traditional IRA

Roth IRA

Doesn’t Matter!


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• Building The Asset Location Priority List

0%

2%

4%

6%

8%

10%

12%

Most Tax Efficient Least Tax Efficient

Exp

ecte

d R

etu

rn

Tax Efficiency

S&P 500 Index

Commodities Funds

Emerging Markets

MSCI EAFE Int’l

MLPs

Cash

Gov’t Bonds

High-Yield Bonds

Sector Rotation Fund


Ongoing Implementation

• Annual Adjustments and Monitoring…• Transfer RMDs

• Update Asset Location Priority List

• Partial Roth conversions

• Tax Loss Harvesting

• Or Tax Gains Harvesting!?

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The Withdrawal Policy Statement

• Crafting A Withdrawal Policy Statement

Income goals (how much?)

Available assets (what will we use?)

The initial withdrawal rate

Liquidation/sourcing methodology(interest/dividends/capital gains; account types)

Adjustment triggers(thresholds & magnitudes)


Tax-Efficient Withdrawals

• Coordinating Tax-Efficient Withdrawals…

IncomeFocused

Capital Gains Top-up

Fully-InvestedTotal Return

AssetAllocation

AssetLocation

TransferRMDs

Update AssetLocation

Partial RothConversions

Tax LossHarvesting

Tax GainHarvesting

Taxable First

IRA First

Split

Partial RothConversions

Tax Equilibrium

IdentifyingCash-Flow Sources

(& Costs)

Account Sequencing(& Finding Tax Equilibrium)

Coordinating Portfolio Implementation(Asset Location)

AnnualAdjustments

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Tax-Efficient Withdrawals

• Coordinating Tax-Efficient Withdrawals…

• Still starts with goals

• Generating cash is not the same as generating income!

• Enhance tax-efficient wealth with…

• Effective asset allocation

• Optimal asset location

• Maintaining tax bracket equilibrium

@michaelkitces

Questions?Handouts & additional materials:

www.kitces.com/FPANEO21

Contact: [email protected]

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