Episode summary
How Advisors Can Create Tax Alpha in Retirement Income Planning
Summary
Wade Pfau argues that retirement distribution planning can create substantial “tax alpha” when advisors manage withdrawals with taxes in mind rather than simply filling brackets. He says the goal is to coordinate taxable, tax-deferred, and Roth assets so clients can reduce lifetime taxes and increase after-tax spending and legacy value.
He emphasizes tax diversification and warns that too much tax-deferred money can become a problem once required minimum distributions begin. For retirees in their 60s, especially those delaying Social Security, he says there may be a window of low taxable income that allows Roth conversions or long-term capital gains harvesting at favorable rates, including the 0% capital gains bracket.
Pfau says advisors must account for tax-code nonlinearities such as Social Security taxation, IRMAA, deduction phaseouts, and Affordable Care Act subsidy effects. He also warns that software which only fills tax brackets can miss these interactions, and that distribution decisions should be built around RMDs, current income sources, spending needs, and then Roth conversions or gains harvesting where appropriate.
Key takeaways
- Pfau says advisors can add “a lot of value” by managing retirement distributions efficiently and capturing tax alpha.
- He warns that having too much tax-deferred money can create problems once RMDs begin.
- Pfau says retirees delaying Social Security may have a low-income window to do Roth conversions or harvest long-term gains.
- He says a dollar from an IRA can effectively trigger a 27% marginal tax rate when capital gains stack on top of ordinary income.
- Pfau recommends starting with RMDs and spending needs, then looking for Roth conversion and capital gains harvesting opportunities.
Notable quotes
“there's so much tax alpha available that if you're efficient with taxable distributions and and managing that process, you can add a lot of value to your clients”
“Tax diversification means having some of each and then generally people will fill their tax advantage space”
“they may have a window where they don't have a lot of taxable income, that can create opportunities to do either Roth conversions or gains harvesting”
“the biggest mistakes I see are so many software packages still anything that just fills a tax bracket is going to miss a lot of important points”
“you might want to stop distributing from the tax deferred account because it's going to be hit by some of these nonlinearities in the tax code”
How the episode opens
Are taxes quietly eating away at your client's retirement income? To learn more, I'm joined by Wade Fowl. Wade, welcome. — Thank you. Great to be here. — So, we're going to talk taxes a little bit. You have a session here at the Horizon's event on tax efficient retirement distributions. So, in one sentence, what's the why for advisors? What are they leaving on the table? The why has got to be that there's so much tax alpha available that if you're efficient with taxable distributions and and managing that process, you can add a lot of value to your clients.
And you emphasize tax diversification. What does a well-diversified retirey balance sheet look like across taxable and tax deferred and Roth?
Yeah. Well, we use those terms to really highlight what's available. policy of taxable brokerage accounts, tax deferred the IAS, 401ks and things and then the the tax exempt Roth accounts.
Tax diversification means having some of each and then generally people will fill their tax advantage space. So they may have less taxable assets unless they're big savers then they might have a quite large taxable portfolio. But the issue really with tax diversification is not having too much tax deferred accounts as you get into retirement and get to those ages where RMDs begin.
So, if a client is say 60 years old already, what's still realistic then to improve?
Mhm. Well, if they're retired, so in their 60s, and if they're delaying social security, they may have a window where they don't have a lot of taxable income, that can create opportunities to do either Roth conversions or gains harvesting, the long-term capital gains, filling up that 0% rate available potentially for for those assets to just voluntarily pay taxes before necessary to help lay the foundation for less taxes in the future and ultimately more after tax spending.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- tax alpha
- retirement income planning
- tax diversification
- roth conversions
- capital gains harvesting
Watch the episode
Watch “How Advisors Can Create Tax Alpha in Retirement Income Planning” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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