9 Tax-efficient withdrawal strategies

During the decumulation phase of retirement, individuals must often draw down their savings to pay for expenses. There are several strategies for choosing which investment accounts to liquidate first. Choosing an optimal strategy can extend the life of your assets by years, and we will write some Python code to quantify the differences between several strategies.

9.1 The intuition behind tax-efficient strategies

Before we analyze various withdrawal strategies, it will be helpful to understand the intuition behind them. Two general principles can explain why some strategies perform better than others. Those principles have complications and exceptions, but we will discuss those later.

9.1.1 Principle 1: Deplete less tax-efficient accounts first

The conventional wisdom is to withdraw from taxable accounts first and then withdraw from IRA and Roth accounts after the taxable accounts are depleted to let the tax-advantaged accounts grow as long as possible. Taxable accounts, such as brokerage accounts, face a tax drag on returns when interest, dividends, and realized capital gains are taxed every year rather than growing tax-free.

9.1.2 Principle 2: Keep tax brackets stable over time

9.2 Examples of sequencing strategies

9.2.1 Starting assumptions

9.2.2 Tax-sequencing code

9.2.3 Strategy 1: IRA first

9.2.4 Strategy 2: Taxable first

9.2.5 Strategy 3: Fill lower tax brackets

9.2.6 Strategy 4: Roth conversions

9.3 Additional complications

9.3.1 Required minimum distributions

9.3.2 Inheritance

9.3.3 Capital gains taxes