Optimal withdrawal strategy for tax efficiency
I am looking for an academic study that discusses withdrawal strategies and ordering of distributions from taxable, tax-deferred, and tax-free assets. In particular, does it make sense to use some of a clients IRA dollars to fund withdrawal needs (at lower tax brackets) when they have suffcient resources in taxable assets?
Permalink Submitted by Alan - IRA critic on Mon, 2013-04-15 18:54
The basic goal is to level the taxable income from year to year to avoid exposure to higher brackets. In a year with low taxable income, doing a TIRA withdrawal makes sense, more specifically if they do not need the money the withdrawal would take the form of a Roth conversion. Doing the conversion will reduce future RMDs that could be exposed to higher tax rates and the Roth gains will be tax free.That said, determining the tax implications are more complicated than simply topping off the current bracket. Taxation of SS benefits, IRMAA (surcharged Medicare premiums), the new Medicare tax on investment income etc must be factored in. Having a strategy is critical, but to execute the current year strategy, you will need to use tax software to determine your actual marginal rate for conversions. I will post some strategy links later on.