Social Security payments and withdrawals from tax deferred accounts can be coordinated throughout retirement to lower an individual’s taxes, according to authors William Reichenstein and William Meyer.

The strategy involves drawing down from tax deferred accounts to achieve the lowest tax rate in retirement years, the they said.

Reichenstein is professor emeritus of investments at Baylor University and head of research at Social Security Solutions, a firm that developed software to help individuals decide when to begin taking Social security benefits. Meyer is CEO of Social Security Solutions. Both men have written extensively about Social Security strategies and how to maximize benefits.

The latest strategies unveiled by the two in a recent whitepaper show how advisors can help clients use tax brackets to determine withdrawals, which can add substantial value to many retired clients’ financial portfolios.

“Advisors need to incorporate withdrawal strategies that minimize Social Security taxes. Showing how to keep more of their Social Security by paying less in taxes adds a significant amount of value,” Meyer said in an email. “Many advisors think Social Security taxation does not apply to their clients. We show that coordinating a smart Social Security claiming decision with a tax-efficient withdrawal strategy can add value to mass affluent clients with savings of up to $2 million.”

The strategy can enable many retirees with financial portfolios of up to $2 million to pay taxes on less than 85% of their Social Security benefits, he added.

The first step of the strategy is to delay receiving Social Security benefits until age 70, when payments achieve the highest rate possible for the rest of the beneficiary’s life. Instead of relying on Social Security benefits for the first few years of retirement, before the person reaches age 70, withdrawals should be taken from Roth accounts, where the taxes have already been paid.

Second, in later retirement years, they should withdraw from their tax deferred accounts either the required minimum distribution or enough to fill in lower tax brackets, whichever is higher, the pair said.

They should then make tax-free withdrawals from their Roth accounts to meet the rest of their spending needs. For most retirees, the early-year Roth conversions are necessary to produce the ammunition that is necessary to greatly reduce their projected lifetime income taxes, according to the paper. If the Roth balances are not present then, in their later retirement years, these retirees will be forced to withdraw additional funds from their tax deferred accounts to meet the rest of their spending needs, raising their tax bill.

The Roth balances provide the additional spending money that can be used without raising the tax rate, they said.

Reichenstein and Meyer developed various scenarios in the paper to show how retirees with portfolios worth between $1 million and $2 million can save on taxes. “In each case, a financial advisor could add substantial value to these clients’ accounts by recommending some version of this general withdrawal strategy,” they said.

The optimal withdrawal strategy varied depending on whether the client is single or married, the size of the client’s financial portfolio, and the client’s spending goals. In some instances, depending on the size of the portfolio, the amount to be paid for Medicare benefits can also be reduced.

“All advisors need to include these analyses for many of their retired clients and not be fooled into thinking that these clients are not impacted by a potential tax torpedo,” they said in the paper. “Financial advisors can add a lot of value to many of their clients’ accounts by recommending a tax-efficient withdrawal strategy.”

“Compared to the conventional wisdom withdrawal strategy, each of these retired households that follow this a version of the withdrawals from tax deferred accounts, combined with delaying Social Security benefits, can substantially reduce lifetime income taxes, reduce the amount of Social security benefits that are taxable, and lengthen the projected longevity of their financial portfolio,” they continued.

“Financial advisors can add a lot of value to many clients by recommending that they delay the beginning of Social Security benefits and using Roth conversions in these early years,” Reichenstein said in an email. “Then, after Social Security begins, they can make tax-free Roth account withdrawals that allow them to avoid making additional tax deferred account withdrawals.

“An advisor focusing on tax brackets like the 25% bracket could result in a rate of 46.25% on the next dollar of withdrawal to generate income,” he added.