Optimal Strategies for Traditional versus Roth IRA/401(k) Consumption During Retirement

DiLellio, James; Ostrov, Daniel N.

doi:10.1111/deci.12222

Cited by 9 publications

(13 citation statements)

References 6 publications

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“…Their article is the first to highlight how different investment returns in tax-deferred and tax-exempt accounts influence the benefit of tax-exempt conversions. DiLellio and Ostrov (2017) show that, under progressive income tax rates, there is a simple geometric representation of account consumption that maximizes wealth transferred to an heir. They also note the existence of multiple optimal solutions for income falling within a given tax bracket, which can confound general-purpose optimization algorithms.…”

Section: Objective Wealth Functions and Tax Law Modelsmentioning

confidence: 99%

Seeking tax alpha in retirement income

DiLellio,

Simon

2023

FSR

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We provide a framework to find an optimal decision for tax-efficient retirement income. By developing a model for income and capital gains tax with stock and bond investments in tax- deferred, tax-exempt, and taxable accounts, we identify three categories of retirees based on their income needs and net worth. We propose and evaluate a simple heuristic to determine the optimal retirement income strategy, quantifying a 0.5% annual return benefit. We call this benefit tax alpha and show its robustness to varying model input parameters. We also suggest approaches for large institutions or FinTech firms to improve their existing financial planning tools.

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Section: Objective Wealth Functions and Tax Law Modelsmentioning

confidence: 99%

Seeking tax alpha in retirement income

DiLellio,

Simon

2023

FSR

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“…We show the cost of achieving this diversification by performing a Roth conversion. DiLellio and Ostrov (2017) and Geisler and Hulse (2018) showed how conventional wisdom for retirement income drawdowns can be improved by equalizing taxable income across years. We show how Roth conversions can help offset the need to generate taxable income in future years.…”

Section: Literature Reviewmentioning

confidence: 99%

“…For example, it is common practice to develop a TDA distribution plan that avoids “spikes” in income over multiple years, as suggested by DiLellio and Ostrov (2017), and Geisler and Hulse (2018). So, a retiree or financial planner should be able to predict how much unused current tax bracket income will be available.…”

Section: The Optimal Decision When Taxes Are Paid By Converted Assetsmentioning

confidence: 99%

Optimal decisions under price dynamics for Roth conversions

DiLellio,

Goldfeder,

McQuarrie

2023

Fin Plan Rev

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Retirees are faced with a variety of choices during their working and retirement years on how to best support their retirement lifestyle and estate planning goals. One of these choices is the option to convert a portion of their pretax savings from a tax‐deferred account (TDA) into a tax‐exempt Roth account. In this article, we quantify the Roth conversion payoff and when/how it depends on investment returns. We show that, while the use of taxable account assets may produce a larger payoff than early withdrawals from the Roth IRA, large unrealized taxable account gains and estate plans may change this calculus. Our work provides a recommendation on how current dividends or cash versus appreciated assets should be used to optimize Roth conversion payoffs, and informs FinTech companies and robo‐advisors on how to best support this important option for millions of current and future retirees.

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“…The optimal strategy that we propose and use here is to move beyond the tax bracket limitations in the informed strategy and simply choose the optimal constant TDA consumption level, L, leading to the lower right panel in Figure 1. This is akin to the approach taken in DiLellio and Ostrov (2017), where L is found analytically for deterministic returns, a known time of death, and no taxable account. In this paper, we have stochastic returns, a distribution for the time of death, and a taxable account, so the optimal constant TDA level, L, must be determined numerically.…”

Section: Tax Optimization: Past Approaches and Our Approachmentioning

confidence: 99%

Combining Investment and Tax Strategies for Optimizing Lifetime Solvency under Uncertain Returns and Mortality

Das

Ostrov

Casanova³

et al. 2021

JRFM

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This paper considers investors who are looking to maximize their probability of remaining solvent throughout their lifetime by using an algorithm that aims to optimize their investment allocation strategy and optimize their tax strategy for withdrawal allocations between tax deferred accounts (TDAs), Roth accounts, and taxable stock and bond accounts. This optimization works with stochastic investment returns and stochastic mortality, extending and combining different investment and tax-efficiency paradigms. We find that optimizing the investment strategy has a much larger impact on the investor remaining solvent than optimizing the tax strategy. This result is key to effectively optimizing both strategies simultaneously. This optimized investment strategy soundly beats a standard target date fund strategy, and the novel optimized tax strategy displays optimal desired properties suggested by non-stochastic tax optimization research.

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Optimal Strategies for Traditional versus Roth IRA/401(k) Consumption During Retirement

Cited by 9 publications

References 6 publications

Seeking tax alpha in retirement income

Seeking tax alpha in retirement income

Optimal decisions under price dynamics for Roth conversions

Combining Investment and Tax Strategies for Optimizing Lifetime Solvency under Uncertain Returns and Mortality

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