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Understanding a “Tax Efficient Distribution Strategy” to Pay Less Taxes in Retirement


In the accumulation phase of life, you were saving. But, if you’re at the distribution phase now, you are drawing down your retirement assets.

“How you spend your retirement dollars in retirement IS JUST AS IMPORTANT as when you were accumulating them.”

If you don’t have a plan for maximizing your withdrawal strategies, then you will potentially be paying more in taxes in retirement than you think.  Required Minimum Distributions (RMD) and Social Security can drive up taxable income starting at age 70.

Has your CPA or advisor shown you what a Tax Efficient Distribution Strategy looks like?

The complexity of this topic has made it difficult for the average advisor to effectively deliver the message to their clients or potential clients.

Related: How to Fix a Late Start for Retirement With a Pension Plan

Related: What You Need To Know About Tax Advantaged Retirement Plans

The problem is that a lot of firms are handling this situation poorly.  Not all retirement savings assets are equal from a taxability standpoint:

  • Taxable
  • Tax Deferred
  • Tax Free

A comprehensive retirement plan should illustrate:

  • Which Accounts Money Should Be Taken From
  • In What Order
  • What Conversion Opportunities Exist to Maximize Efficiency

There are 3 drawdown strategies to consider.

  1. Pro Rata Strategy – Withdraw from taxable, tax deferred, and tax-free accounts proportionally. (Not optimal in most cases)
  2. Sequential Strategy – Withdraw from taxable accounts first; then tax deferred accounts; lastly tax free.  The classic approach.
  3. Sequential with Roth Conversion Strategy – Withdraw from taxable accounts first; then tax deferred accounts; lastly tax free.  Roth conversions are executed to take advantage of periods of lower tax brackets. *

As “baby boomers” transition to retirement, executing a smart tax efficient distribution strategy will potentially help so you can grow your retirement assets faster by allowing them to remain invested rather than used to pay unnecessary taxes in retirement.

Quote: “The Right Price for Anything You Value Would Never Be Zero.”

P.S. The video on Tax Efficient Distribution Strategies can be viewed here.

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