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.