Constructing Tax Efficient Withdrawal Strategies for Retirees with Traditional 401(k)/IRAs, Roth 401(k)/IRAs, and Taxable Accounts

Abstract

We construct an algorithm for United States retirees that computes individualized tax-efficient annual withdrawals from IRAs/401(k)s, Roth IRAs/Roth 401(k)s, and taxable accounts. Our algorithm applies a new approach that generates an individualized strategy that results in consistent improvements over non-individualized withdrawal strategies currently advocated by financial institutions and academics. Among other results, we quantifiably demonstrate why retirees should avoid, not seek, dividend producing stocks in their taxable accounts. Our model, which can work to optimize either portfolio longevity or the bequest to an heir, accommodates many salient tax code features, including dividends, different taxable lots, conversions, and required minimum distributions.

Keywords: retirement income, tax efficiency, optimization

JEL Classification: G11, H21