Also, remember the slides, if you're having trouble seeing them or you just want them, they're downloadable. If you go to the Bogle Center website, you can click on the link and you can download all the slides for this presentation. All right, our next speaker, I have a page worth of introductory material on Wade.

He has done so much, but I am not going to read it all to you. I'm going to give you a very brief summary. Wade has a PhD, he has a CFA, he's the founder of Retirement Researcher, which is an educational resource for individuals and financial advisors on topics related to retirement income planning.

He holds a doctorate in economics from Princeton. He's published more than 60 research articles. He's a past selectee for many, many lists of important people. He has contributed to Forbes and Advisor Perspectives and for the Wall Street Journal. He's spoken at many national conferences, including the CFA Institute, the CFP Board, NAPFA, et cetera, et cetera, et cetera.

He is a return speaker here at the Bogle Heads Conference. He's been here several times, and is also the author of four books in the Retirement Researcher's Guide series. Wade, thank you so much for being here, and we're going to enjoy your presentation. >> Hey, thanks so much, Jim.

Thank you. It's great to be back at Bogle Heads, and for the next 25 minutes we're going to go on a rollercoaster ride, literally when you see what these tax maps look like. We're going to talk about tax-efficient retirement distributions. There is a lot of content, so I'll have the same challenge as the other speakers.

I don't know if I'll get through all these slides or not, but let's dive into it. This is a big deal, what we're talking about, just being smart about where you take distributions from can have a significant impact on portfolio longevity or framed a different way on the remaining legacy value of assets at the end of retirement.

Why is that? It's because we're maneuvering in the United States a progressive tax system, not just the fact that income tax rates increase as you get to higher income levels, but there's a lot of other factors that we're going to be talking about. And so we want to strategize around paying taxes when we can do so at a lower rate in order to avoid having to pay taxes later at a higher rate.

The tax code is filled with a number of nonlinearities and traps that we have to deal with. The effective marginal tax rates on a dollar of income, the dollar of tax paid on the last dollar of income can be quite a bit higher than income tax rates, and we're not even getting into state income taxes, this is purely today going to be in terms of federal income taxes and all its related nonlinearities and traps.

And there can be many different types of tax treatment in the tax code that need to be coordinated. So some of these nonlinearities that are relevant for what we're talking about here, many tax rules do connect to adjusted gross income, not taxable income. Itemized deductions only count when they're higher than the standard deduction.

That's not relevant, I'm just going to be assuming the standard deduction for what I'm talking about today. But there are strategies around deduction bunching and that sort of thing as well. Preferential income sources, and this is an important point that if you haven't really thought about before, it's big.

They stack on top of ordinary income. So you can easily get yourself into a situation where when you generate ordinary income, you're also pushing your long-term gains into a higher tax bracket at the same time. A dollar of income can trigger tax on Social Security benefits. A dollar of income can trigger higher Medicare premiums, and Mary Beth already introduced us to that concept earlier with those IRMA surcharges.

A dollar of income can trigger the loss of subsidies if you're getting health insurance to an Affordable Care Act plan that is eligible. And then we have the 3.8% net investment tax as well on that investment income. And then the big one is that we're going to try to plan for, and what a lot of this is doing is trying to prepare in advance for the day that we're hit by required minimum distributions.

They can force you to generate a lot of taxable income that you may not want, and that may cause all these nonlinearities to kick into effect so that you'll see what we're trying to avoid by planning ahead and getting those RMDs down before they begin. So simply we have total income, above the line deductions removed from that, give you adjusted gross income, below the line deductions or the standard deduction in this context will give you taxable income, and then I'm just showing this to now simplify.

We're talking about different types of investment accounts, so taxable brokerage accounts, tax deferred accounts, which from now on I'll just call IRA to make it simpler, and then after tax or tax exempt accounts that I'll just simplify as a Roth IRA. So when I'm talking about all this tax planning, it's going to be your taxable account, your IRA, or your Roth IRA.

Now, it could be much broader than that, but we only have 25 minutes to avoid, well, all these potential options, tax-efficient retirement distribution strategies. So the starting point, and it's not the worst thing you can do, it's reasonable, but we're going to show how we can do a lot better than this, but the conventional wisdom starting point for spending on assets in retirement is you spend on your taxable account first, then your tax-deferred accounts or your IRAs, and then your tax-exempt account you save for last, or your Roths.

Now, that's a starting point that we're going to talk about doing better. Now, how can we do better? I'll be talking about this idea of effective marginal tax rate management. The idea is we're going to aim to fill up -- we're going to want to pay taxes. We have to pay taxes at some point.

We're going to look for opportunities to pay them at lower rates. So we're going to fill up lower brackets with income and then draw from elsewhere, if we can set this up in advance, to avoid getting pushed into these higher effective marginal tax rates. Now, RMBs are going to be a big problem in the future.

So we're doing a lot of this in advance of when RMBs begin. A part of this is going to be you end up paying taxes in the short-term to get long-term benefits. A lot of retirement income planning shares that theme. Short-term sacrifice can create great long-term benefits, and the biggest impacts for this in the tax code, they occur at a spot that's $100 a part for singles, $200 a part for couples.

I don't know why they made this difference, why they didn't just put it in the same spot, but when you shift from right now 12% to 22% for ordinary income, that's a big jump in the taxes at these income levels, and then preferential income at about the same point is going to be switching from the 0% bracket to the 15% bracket.

Then we have lots of income sources. I'm not really going into detail on this other than to say we've got ordinary income that what I'll be showing you with these tax maps will mostly relate to IRA distributions and then the taxable portion of Social Security. We have our preferential income sources, qualified dividends, and long-term capital gains that we may be forced to take just because if we have taxable assets, it's going to be kicking off qualified dividends.

In addition to if we're selling shares of that, that will also generate long-term gains. And then we have non-taxable sources, which will be, for this context, the Roth IRA, and then the portion of Social Security that's not taxed, which we have some ability to reduce. We can get more of that Social Security to not be taxable by planning ahead.

Now part of this is going to involve Roth conversions, which are IRA distributions to the Roth IRA. You cannot Roth convert your RMD, so that's why it becomes a lot harder to do Roth conversions after RMDs begin. We're trying to do this before RMDs. Ideally, we'd pay taxes from elsewhere.

We wouldn't pay it out of the IRA. But it's not necessarily a huge difference if you don't have any taxable assets anymore. But in an ideal world, you'd be paying the taxes from somewhere else, not from money you're taking out of the IRA. You can have a big window of opportunity to do this in your 60s if you're retired and delaying Social Security.

You could also be thinking ahead about potential large health bills or long-term care that's deductible, having some IRA money to offset that, which would be a reason to not fully convert everything. And then also during a market downturn, if you do have resources that are not losing value, that can be a good opportunity to do conversions at a lower bill.

You get more shares moved over at a lower cost relative to before the market decline. Why might you want to front-load taxes? And this is not a political discussion at all, but just to the extent that we don't know what the future tax code will look like, the odds are if anything changes, it's probably going to be a change towards higher taxes than what we see today.

The current legislative code is in 2026, the tax rates are going to be going up. And I've incorporated that into this analysis, but we never know. Maybe the current tax code could be made permanent, or what other changes might come along. Now the tax implications of a death of a spouse are pretty big, and I'll show specific tax maps for single individuals versus married filing jointly.

You'll see what I'm talking about here. A single individual can face a much higher tax bill. Their spending may decline, but their overall taxes may increase, and I'll show this. We want to be, again, preparing in advance for required minimum distributions and the impacts that would have. And then also with the SECURE Act that passed in 2019, the old lifetime stretch on an inherited IRA for adult beneficiaries, adult children beneficiaries, now becomes a 10-year window.

That could push them to take these out during high earnings years potentially, if they receive this inherited IRA in their 50s. It's not necessarily a great time for them to have to deplete that over the next 10 years. So helping to manage that process as well. Now here's a case study.

I won't have time to go through all the details, but it's just illustrating the idea. This is showing how much taxes are paid every year, where the yellow is the conventional wisdom. Spend your taxable, then tax deferred, then tax exempt. And then the purple is the tax bills related to a more tax-efficient strategy, which I labeled here in a difficult way and then later realized, actually, I can make this simpler.

This is pretty much going to be the same as you're going to manage the 15% marginal tax rate. You pay taxes whenever you can do so at 15% or less. So then what happens is you do face higher tax bills in your 60s. But by the time Social Security starts at 70, you're in a position where now RMDs are going to start at-- well, you do have some years where no taxes.

Then once RMDs begin, we didn't get this aligned perfectly between the RMDs and the taxable part of Social Security, we do face a little bit of taxes. And that's going up over time because the Social Security brackets are not inflation adjusted, unlike everything else. So I'm not assuming any changes to the current law there.

That's why taxes-- in inflation-adjusted terms, this is all inflation-adjusted purchasing power-- why the taxes creep up over time. And then we're running this plan out through age 95 with the conventional wisdom strategy. Their after-tax legacy is $37,000. With managing the 15% marginal tax rate, their after-tax legacy is about $160,000.

So again, potentially big differences here. And this was a couple that had $1.5 million of investment assets at age 62. So let's dig into this more. What pitfalls-- so I'm saying, OK, let's pay taxes in advance. What pitfalls are there when you do that? Or conversely, what pitfalls can we help to avoid later when we do that?

Well, this is the federal income tax brackets. Like I mentioned, they are progressive. As your income increases, your taxes go up. And you have to look at the title of each slide, because they're going to be jumping around. I'm just showing this. You have no Social Security benefit and no preferential income in this slide.

So that means this is adjusted gross income. Later, the x-axis will change to ordinary income other than taxable Social Security. The way Social Security is taxed is super complicated. If they wanted to design something even more complicated, it makes it very hard to make these charts. So I'll be careful here.

Here we've got adjusted gross income on horizontally. We have the federal income tax brackets. Now let's talk about what happens when we're generating more ordinary income. This is out of order. But we'll have the Social Security tax torpedo. We'll have this issue. And this is the first one, pushing preferential income into higher tax brackets, and then IRMA surcharges.

And then there is the Affordable Care Act issue. But I'm not going to include that in these tax maps. I'll show you what it looks like real quick later. The preferential income brackets are not the same as the ordinary income brackets. Here's what they look like in 2023. Any day now, we'll probably get the 2024 numbers.

OK, so here's a quick example of what I'm talking about, just so that it can make sense. The idea is your preferential income stacks on top of your ordinary income. So we'll take a single individual. They have taxable income of $44,625. So it's more than-- if this was the all ordinary income, they would be in the 22% bracket.

But this is the $40,625 of ordinary income, $4,000 of long-term capital gains. So that $40,625 is in the 12% bracket still. This is a single filer. With their $4,000 of long-term gains, $2,000 of that still falls in the 0% preferential bracket. $2,000 of that falls in the 15% bracket.

Now what happens if they take $1 out of their IRA? So they've got $1 more of ordinary income. That's taxed at 12%. But now that's changing. Now when you stack your preferential income on top of that, now just $1,999 is in the 0% bracket. $2,001 is now in the 15% bracket.

So we took $1 out of the IRA. That's also pushing $1 preferential income into the 15% bracket. That's adding another 15% of taxes. So that's a 27% marginal tax rate. So now their Social Security is still zero, but they have forced $20,000 of preferential income qualified dividends off their brokerage account.

Now that this is what's going to happen, we're starting to create these tax maps. We're going to have this range where they were in the 12% federal income bracket, but they're paying a 27%. And then later on when they're getting closer to that $250,000 threshold, they're then in the 24% bracket, but then another 3.8% on top of that for preferential income.

Social Security tax torpedo. So up to 85% of Social Security benefits are taxable. I'm not going to go-- we don't have time for the whole explanation of how they're taxed. We'll kind of leave it at that. But that tax schedule was created in 1994. And it's not inflation adjusted, one of the rare aspects of the tax code, where every year more and more Americans face taxes on their Social Security benefits.

It is a complicated process to determine what percentage of that is taxed. And proactive planning, though, does help to avoid the full tax torpedo. And that is a key aspect of tax efficiency in retirement. So I absolutely agree with Mary Beth that it's best for the hirer to really think seriously about delaying to 70.

This is a-- but wait, there's more. If you're delaying until 70, you can give yourself a big opportunity to not just have a higher Social Security benefit, but to have less of that benefit taxed if you're doing tax planning in the meantime. And here's what this tax torpedo looks like.

So we're moving along. We think we're in the 10% bracket. And so now we have-- this is a couple. They have $52,200 of Social Security. They have no preferential income right now. And now the x-axis is not adjusted gross income anymore, because it makes it a lot harder to do that.

It's your ordinary income, not including taxable Social Security. So we're moving along. We're taking money out of our IRA. We think we're in the 10% bracket, but we're getting hit by-- this is where, if I take a dollar out of my IRA, $0.85 of a dollar of my Social Security is taxed.

That's pushing me to an 18.5% tax rate. And then I get kicked up into the 12% bracket. And now $1.85 with the tax torpedo that I think I'm in the 12% bracket, but I'm being taxed at 22.2% when I add in the fact that this is uniquely causing Social Security to be taxed.

Eventually, I get up to that 85% threshold, and I don't have to worry about it anymore. Now for a single person, this looks a lot worse, because the full impact of the tax torpedo doesn't come in the 12% bracket like with couples. It comes in the 22% bracket for a single person.

And in a few years, that 12% and 22% is going to change to 15% and 25%. But here, they're getting hit by the full burden of the tax torpedo in the 22% bracket, which we're going to multiply by 1.85, because a dollar from the IRA, also then $0.85 from Social Security, 40.7% marginal tax rate.

Then Irma. So Irma's experience-- Mary Beth did talk about this. When you hit certain thresholds, you got a big extra bill. If you're a single person, and you had this in 2023-- well, two years later-- $97,000, you pay your base premiums for Part B and Part D $1 more, and your base premiums are jumping by $937 for the year, or a 93,700% marginal tax rate on a dollar of income.

Now if you do have a life-changing event, like retiring, but Roth conversions don't count as an excuse here, you can file form SSA-44 and ask not to be hit by the Irma surcharge, because it applies to two years later. You take income from this year, and then two years later is when you look at those thresholds and determine if you have to pay a higher tax.

As Mary Beth noted, yesterday, these numbers-- or today-- either yesterday-- the new numbers are out for next year's table, but here's the 2023 table that I'll be using. Now we're back to a scenario where Social Security is zero, preferential income is zero, we're looking at taking money out of our IRA, generating ordinary income, we're moving along the federal income brackets, but then we start getting hit by these Irma thresholds, and there's five of them, and each time you hit one-- this is for a couple, so you take the numbers per person and multiply them by two-- an extra $1,874 in Part B and Part D premiums, then later $2,800, then later another $2,800, and then there's two more that are going beyond where this chart ended.

So that's Irma. Now if you put this all together, so now we've got $52,200 of Social Security, we have $20,000 of preferential income, and we're looking at what happens as we take money out of our IRA. And this is where, if you think ahead, why might we take money out of our IRA?

Maybe there's R&Ds that we don't actually want to spend, but this is what it's doing when we combine all these factors together. This is what the tax map looks like. This is the roller coaster. Your effective marginal tax rate goes up and down as you're generating more income, and it can be a lot higher than what the federal income tax brackets look like.

Now with a single person, again, it looks differently because that tax torpedo hits you in the 22% bracket, and with that preferential income, you think you're-- actually, in this case, so you think you're still in the 12% bracket, but when you take $1 out of 12%, it's pushing another $0.85 of Social Security to be taxed, and then so that's-- we're working our way up, but then we're also getting the preferential income stacking issue, where now we're pushing $1.85 into the 15% bracket.

When you put that all together, this poor person thought they were in the 12% bracket, but when they take $1 out of their IRA, they're paying 49.95% as a tax rate on that dollar. So that's devastating. That's what we're trying to plan for here. And I don't really have time to talk about the Affordable Care Act subsidies, but this is-- if you treat the loss of subsidy as a marginal tax rate, this is an example of what it can look like.

Now there's a lot of variables that go into it, so it's not just one of these, but right now, and at least through 2026, this may change in 2026. Once you get above the 400% federal poverty line threshold for the household, you get this long range where incomes can go quite high, where you're losing $0.085 per dollar as you're generating taxable income.

You're losing the subsidy for your health insurance. OK, so how can we manage this? So we've got these kinds of tax maps that we're trying to figure out, what do we do with these? How can we build an effective retirement income strategy? Well, the way I like to think about this is, first, what could we do to generate the least amount of taxable income?

And that's our starting point. And then can we justify increasing taxable income above that by generally then moving away from Roth distributions to adding IRA distributions? And once we meet our spending goals, should we keep going with that and also do Roth conversions? Constraints on this, well, do we have available funds in our taxable account, tax deferred account, tax exempt account?

Then another constraint is, where are we starting on the tax map? We don't get to start at zero with ordinary income. We may have other sources. So we may have required minimum distributions. We may have Social Security benefits, interest and dividends from our taxable accounts that we can't avoid, any other taxable income sources beyond this, pensions, even employment, anything that's generating taxable income.

We have to use that as our starting point. And then if we're retired, what is our spending goal? How much are we actually trying to spend on a pre-tax basis? That's also going to put constraints on our behavior, because we have to make sure we at least get the funds we're trying to achieve to meet our spending needs.

Okay. So then we take the tax map, and this is the way I've been thinking about this more recently. It's this idea of building a tax map. There's a software out there called Covisum that helped me learn this specific methodology. But what you do is, well, the question is, what we need to solve is, what tax rate should we try to manage?

What effective tax rate should we manage? And it boils down to basic options are, and we'll just use, even though there is no 15% bracket right now, in 2026 it returns, should we use the 15% bracket, should we use the 25%, should we use 28%? I think most of the answers will fall somewhere along there, and it depends really how much money do you have.

15% could be the answer for someone who has a runway to do some tax planning and maybe has one to two million dollars. As we're getting up, I've looked at cases where there's five and a half million dollars to work with and finding that maybe going into that 28% bracket can make sense in those scenarios.

But here, we're just simply, we have to figure out what bracket to manage. Right now I'm just showing you how to make your decisions given that you have a bracket to manage. So if you're trying to manage the 15% bracket, how much income should you generate? The idea is, you want to look for, there's a roller coaster here.

The tax rate can go above 15%, but it can come back down below 15% again. Sometimes it may make sense to generate some income at a higher rate because then you have a big runway of income at a lower rate again, and that's what we're trying to figure out.

Those black dots are marking points where we go above the 15% bracket. And so we want to check those. Well, if we go up to the, starting from zero, zero's identified too, but the first black dot there on the 15% bracket happens with the preferential income stacking, where the marginal tax rate would go up to 27%.

We can generate income up to that point at an effective marginal rate for that whole chunk of income of 7.9%. So that's desirable. We want to do that. Then we're going to check that next group where we're going to go back down below 15% because of that $200 gap that I mentioned earlier.

There is another place where we're paying at 12% for $200. Well, let's check it. No, that's going to be too high of an effective marginal rate. So if I was managing the 15% bracket here, I would go up to where that preferential income stacking became an issue. What if I wanted to manage the 25% bracket?

Well, in this case, I go up to that income stacking, and that's the same. I can do that successfully. Then if I go into that preferential income stacking issue, once I get past that, I'm back down to the 22% bracket for a while. But then I'm going to hit that first IRMA surcharge.

Well, if I check what is the effective marginal rate on that chunk of income, it's 23.3% under our 25% threshold. So that's OK. We'll go ahead and do that. And here, the answer is basically generate income up to the IRMA threshold. And what I'm assuming about the IRMA threshold is I'm just using this year's numbers to make the tax map because it's going to only be relevant-- two years later, I'll pay the tax.

But that's-- what do we do with that? I'm just going to assume you pay the tax this year for the purpose of making the tax maps. We'd stop at the first IRMA threshold because any efforts to go beyond that are always going to generate average tax rates higher than our target.

However, if we were wealthier, probably, so that we actually decide we want to manage the 28% effective marginal rate, well, we can actually do that up to the second IRMA threshold. And so each-- in this case, the first chunk of income staying under 28% gets us to the first IRMA threshold.

We could do that at 14.4% tax, which is fine. Then we have another gap to the second threshold. We can do that under 28%, so that's fine. I think I'm at time, right? So to conclude, we have a progressive tax code. But if we use tax diversification during the accumulation phase and then use these kinds of techniques to manage with Roth conversions and tax rate management, we can build retirement income plans.

Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. you