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The “common rule” tax course: For many financial advisors, the common rule suggests “clients [should] draw required minimum distributions from tax-deferred accounts, when applicable, each year, and then any unmet income needs are subsequently sourced from taxable account funds until these are exhausted.” In addition, it’s advised that general tax-deferred withdrawals are made until these accounts deplete and eventually, the portfolio closes.

When it misses the mark: Although this common rule carries some tax efficiency, the approach fails to consider certain instances when it might make sense to intentionally pay taxes early. As such, the paper states that the optimal tax strategy for you depends on your net worth, desired retirement income and estate goals. DiLellio and Simon found that a tailored course of action to approach tax efficiency can extend the longevity of a portfolio by several years, especially in the following instances:

📌 If passing assets to an heir, to help them reap tax savings.

📌 To avoid large taxes later due to RMDs or by switching tax filing from married to single.

📌 In general, to avoid paying more in taxes due to future tax rate increases (which according to tax specialist, David McKnight, is very likely).

Cue the data: It’s nice to see finally see whitepaper-level research conducted to back what we have been promoting for decades.