Weekend Reading: Managing Taxes in Retirement using the Effective Marginal Tax Rate

This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
Weekend reading managing retirement taxes using effective marginal tax rate Weekend reading managing retirement taxes using effective marginal tax rate
Weekend Reading

To create a “tax alpha” retirement plan, your focus should be on leveraging tax-saving strategies that maximize your after-tax returns.


Running numbers with EMR: Here, past podcast guest Dr. Wade Pfau is joined by income specialist Joe Elsasser to research tax-efficient retirement distribution strategies, aiming to sequence withdrawals from taxable, tax-deferred and tax-exempt accounts. Their study simulates various strategies, considering factors like Social Security taxation, income sources, Medicare premiums and net investment income tax.

The effective marginal tax rate (EMR) method is explored, which involves identifying unavoidable income, creating a tax map to track effective marginal tax rates and determining desirable or undesirable income based on EMR targets. With this in mind, two tax planning strategies are analyzed: the conventional strategy of spending taxable assets first, followed by tax-deferred and tax-exempt assets.

Stress testing: A case study comparing the EMR methodology with the conventional wisdom strategy is then conducted. The results show that managing a 15 percent EMR as the upper limit for desirable income generation leads to a more ideal outcome, supporting a higher after-tax legacy value compared to the conventional strategy. The tax-efficient strategy provides an improvement of 0.41 percent in net after-tax return over the conventional wisdom.

As you can see from this article, there is a LOT that goes into maximizing your tax efficiency in retirement. It’s not just about filling up a tax bracket when you do a Roth conversion.