Practical Considerations in Tax-Efficient Distribution Planning

Research has demonstrated that intentional decisions about which accounts to withdraw from at which points in retirement can add significant financial value. The prior two articles in this series (here and here) examined an upper-middle and higher-income couple throughout retirement to demonstrate value that the effective marginal rate (EMR) framework developed by Covisum offers. Both articles presented case studies that made several assumptions that could be challenged by practitioners. For example, if a segment exceeds a target EMR for a Roth conversion, are there situations in which it may be valuable to make an informed decision that breaks the rule? Further, the case studies assumed a static set of assumptions that were highly unlikely to hold true through a 30-plus-year retirement time horizon.

Tax-efficient withdrawal planning is not a set-and-forget service. How should advisors manage these plans through time? Communication between tax professionals and advisors is necessary to avoid missteps in implementation or tax reporting. What specific considerations are necessary to minimize communication challenges? This article identifies 10 real-world considerations in tax efficient distribution planning from the perspectives of an academic (Wade Pfau, PhD), a practitioner (Joe Elsasser, CFP), and a CPA (Steven Jarvis).

What is the effective marginal rate (EMR)?

The effective marginal rate is the net cost on the next dollar of IRA withdrawal or capital gain recognition, including the impact of interactions with other types of taxes, such as net investment income tax, or losing tax-return-driven subsidies or surcharges, such as ACA premium subsidies or Medicare IRMAA penalties.