The following comic serves as an introduction to the topic, providing a preliminary overview before we delve further.

As 2023 came to a close, financial advisors were actively engaged in end-of-year Roth conversions, strategically shifting funds from qualified, tax-deferred accounts to take advantage of lower tax rates. While this practice is common, there’s an even more substantial opportunity that many advisors may be overlooking. Instead of solely focusing on year-end Roth conversions when a retiree’s tax situation is apparent, advisors can significantly enhance their approach by incorporating tax-targeted distributions from tax-deferred accounts for retirement income throughout the year.

To fully grasp this opportunity, advisors should consider how retirees’ income is being sourced throughout the year. Typically, advisors follow the conventional wisdom of withdrawing from a household’s taxable accounts, followed by tax-deferred accounts, and finally from Roth accounts. This method often results in taxable capital gains when withdrawing from taxable accounts and delaying ordinary taxable income from tax-deferred accounts until required minimum distribution (RMDs) begin.

In years where clients expect to be in a lower tax rate, it may make more sense to withdraw funds from tax-deferred accounts before RMD age, capitalizing on those lower advantageous tax rates. However, advisors often shy away from this approach due to its perceived complexity.

The intricacy arises from the interplay between ordinary taxable income from tax-deferred distributions and capital gains from taxable accounts. This combination can impact the taxation of Social Security, as well as the tax rate for both ordinary income and capital gains. Additionally, the taxation of a household’s other income sources such as pensions, rental income, or part-time work in retirement needs to be considered. Attempting to optimize tax-efficient distributions across a household’s various accounts using a worksheet can be challenging, inefficient, and prone to error.

Empowering your advisors with robust retirement income software that simplifies these complex calculations can lead to more confident and valuable client interactions. Income Discovery’s software features an intuitive, one-click button to determine the optimal incremental effective tax rate for the advisor to target in retirement and provide tax-optimal distribution instructions at the account level for the advisor to execute.

This Retirement Income Distribution software surpasses traditional financial planning tools and can also seamlessly integrate with a firm’s portfolio management system, if desired. The potential value of tax-optimal retirement income distributions for clients is substantial.

A compelling case study highlights this value: in our white paper, we demonstrated that a hypothetical household could boost the confidence in their income plan from 50% to 98%, plus increase their average after-tax bequest (measured in today’s dollars) from nil to $1.4 million. This value addition is akin to generating an additional portfolio return of 275 basis points for the household— commonly referred to as the advisor’s gamma.

It’s time to elevate your advisors to the next level. Equip them with the capability to construct plans for tax-optimal retirement income with just one click and seamlessly execute these plans scalably. Reach out to me to schedule a conversation and explore how this transformative approach can benefit your clients and enhance your advisory practice.