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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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@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
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)
@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
Setting Withdrawal Strategy
How will you generate
income for us from our
retirement portfolio…?
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@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
Four Pillars of Retirement Income
Bond Coupons Dividends Capital Gain Principal
@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
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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@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
Generating Retirement Paychecks
• 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!
@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
Generating Retirement Paychecks
• 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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@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
Generating Retirement Paychecks
• 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
@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
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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@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
Retirement Account sequencing
• Traditional Approach: Retirement Accounts First
Assumptions: $750,000 brokerage, $750,000 IRA,
$80,000/year withdrawal
MK1
@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
Retirement Account sequencing
• Alternative Approach: Taxable Accounts First
Assumptions:$750,000 brokerage, $750,000 IRA,
$80,000/year withdrawal
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Slide 11
MK1 Michael Kitces, 11/20/2018
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@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
10% Bracket
12% Bracket
22% Bracket
Retirement Account sequencing
• 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
@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
Retirement Account sequencing
• Split Approach: Draw Half From Each Account
Assumptions:$750,000 brokerage, $750,000 IRA,
$80,000/year withdrawal
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@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
Retirement Account sequencing
• Comparing Strategies…
Assumptions:$750,000 brokerage, $750,000 IRA,
$80,000/year withdrawal
@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
Partial Roth Conversions
• Systematic Partial Roth Conversions
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@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
Retirement Account sequencing
• Partial Roth Conversions (filling 12% bracket)
Assumptions:$750,000 brokerage, $750,000 IRA,
$80,000/year withdrawal
@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
Retirement Account sequencing
• Comparing Strategies…
Assumptions:$750,000 brokerage, $750,000 IRA,
$80,000/year withdrawal
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@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
Partial Roth Conversions
• Filling The Lower Tax Bracket Buckets
@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
Partial RothConversion
Converting ‘TooMuch’ To Roth?Keep Deferring
Traditional
Partial Roth Conversions
• Finding Tax Equilibrium
TaxEquilibrium
Time
Tax RateNow
Tax RateIn the Future
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@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
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
@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
$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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@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
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
@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
• 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!
Overlaying Asset Location
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@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
Overlaying Asset Location
• 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
@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
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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@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
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)
@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
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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@michaelkitcesHandouts/Materials: kitces.com/FPANEO21
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: questions@kitces.com
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