Thoughts on Retirement Tax Efficiency Planning

By Alan Silverstein, Fort Collins, Colorado. Email me at ajs@frii.com.
Last update: January 11, 2017

Here are some thoughts about tax efficiency planning (and obstacles) for retired people, at least in the US. This is a "forest" of which I often lose track while exploring among the "trees".

Why bother considering this issue at all?

Tax difficulties:

Here are examples of "tax systems" I know about that make modeling, prediction, and optimization difficult (arranged approximately least to most complex):

Some additional points emailed to me by a friend:

Traditional IRA: Distribute or convert?

I think that at least in the age 59.5 - 70.5 range, you should almost always do Roth IRA conversions, and later Roth distributions to refill your short-term spending buckets, instead of direct traditional IRA distributions for spending money. Here's why:

Post-59.5 conversion clock:

Someone asked me how I determined that once you're at least 59.5 there are no longer concerns about 5-year conversions clocks. The answer wasn't simple or airtight. First look at 26 USC 408A that I found, which is the actual law. Here's one legible source for it.

It says in part:

  (d) Distribution rules -- For purposes of this title.
    (1) Exclusion
    Any qualified distribution from a Roth IRA shall not be includible in gross income.
    (2) Qualified distribution -- For purposes of this subsection.
      (A) In general -- The term "qualified distribution" means any payment or distribution.
        (i) made on or after the date on which the individual attains age 59.5...

But later (look for "5-taxable year") it talks about section 72 versus rollovers, which is another (ambiguous) name for conversions here. It doesn't actually say, "except if you're over 59.5," but this is inferred from strict reading.

Then there's the IRS Pub 590-B, figure 2-1 flowchart.

And in fact numerous reputable sources come to this same conclusion; see for example:

Miscellaneous other considerations: