Our approach

Four questions we come back to

We do not apply the same plan to everyone. But four questions come up with nearly every client, they interact with each other, and the answers have deadlines. These are the frameworks we use to work through them.

Planning for retirement is usually described as an investment problem. How much do you need, what return gets you there, how much risk can you tolerate. Those questions matter, and they are also the easiest part. By the time someone is a few years out, the harder work is deciding what to do with what they have already accumulated, and most of those decisions are about taxes rather than about markets.

What the four frameworks below have in common is timing. Each one describes a decision that is available for a period and then is not. A low-income year passes. A conversion window closes when required distributions begin. A move out of state fixes some facts on the day you leave. We spend most of our time identifying which decisions have dates attached and making them before the date rather than after.

None of this depends on knowing what markets will do. We do not think anyone knows, including us, and a plan that requires a forecast to work is not a plan we want to give you. What these frameworks require instead is a reasonable picture of your income over the next ten or fifteen years, which is knowable, and the discipline to act on it in the right year.

The Tax Window

For most people there is a stretch of years in which taxable income falls well below what it was while working and well below what it will be once required distributions and Social Security have both begun. It usually starts at retirement and ends when required distributions begin, which under current law is age 73 or 75, depending on the year you were born. For some people it is a decade. For others it is two years, or it never really opens at all.

Continue readingShow less

The window matters because it is often the least expensive time to move money out of a traditional IRA, which is why it is also called the Roth conversion window. A dollar converted during it is often taxed at a lower rate than the same dollar would be later, and once converted it can grow without generating future taxable income. The constraint is that the window is finite and nothing about it announces itself. Most people do not notice it until it has partly closed.

Finding the window

The first step is a projection of income year by year rather than an average. We look at when earned income stops, when Social Security is likely to start, when required distributions begin, and what else is scheduled to arrive in between. The shape that produces is rarely flat. There are usually two or three years that are markedly lower than the rest, and those are the years worth planning around.

Deciding how much to use

Knowing the window exists does not tell you how far to fill it. Converting more in a given year means paying tax sooner at a known rate, in exchange for removing future income taxed at an unknown one. There is a point past which the tax paid today outweighs what it saves, and where that point sits depends on the balance, the years remaining, and what you intend the money for.

Low-bracket years
The years after earned income stops and before required distributions start are often the lowest-taxed years of an adult life, and they are finite.
A cost paid on purpose
Conversions are not free. The question is not whether to pay tax but whether to pay it now at a rate you can see or later at one you cannot.
A date you did not choose
Required distributions begin at an age set by statute, and everything not addressed before then becomes taxable income whether you need it or not.

Asset Location

Two people can hold the same investments in the same proportions and end up with different after-tax results, because of which accounts the holdings sit in. Account types are taxed differently. A Roth grows and comes out untaxed. A traditional IRA turns every dollar into ordinary income on the way out. A taxable account is taxed as it goes, at rates that depend on what the holding produces.

Continue readingShow less

So the same portfolio can be arranged well or badly. Putting the holdings expected to grow most into the account that is never taxed again, and the holdings that throw off ordinary income into the account where that is already the treatment, can improve the after-tax result without changing the portfolio's overall allocation. It is one of the few decisions in this work with relatively little trade-off.

Matching the asset to the account

The general shape is that the highest-growth holdings belong where growth is never taxed, income-producing holdings belong where the income is sheltered, and tax-efficient holdings belong in the taxable account where they generate little to tax. That is the starting point rather than a rule. Which holdings those are for a given person depends on the allocation, the account balances, and what is already there.

Where it stops applying

Location only helps when there is meaningful money in more than one account type. If nearly everything sits in a traditional IRA there is nothing to arrange, and the work is conversion instead. It also competes with other priorities. A taxable account holding a large embedded gain may be worth leaving alone, because the tax cost of rearranging it exceeds what the rearrangement would save.

Three tax treatments
Roth, traditional, and taxable accounts are taxed in three different ways, and which holding goes where follows from that.
Rebalancing across the whole
Once holdings are placed deliberately, accounts stop matching each other and the portfolio has to be managed and rebalanced as one.
The cost of moving
Rearranging a taxable account realizes gains, so the improvement has to be worth what it costs to get there.

Account	Generally suited to	Generally not suited to
Roth IRA	Holdings with the highest expected growth, spent last	Bonds, cash, and money needed in the near term
Traditional IRA	Bonds and other holdings producing ordinary income	The fastest-growing positions, which compound into future income
Taxable	Tax-efficient equity funds, and assets you may give away	High-turnover funds and holdings paying taxable interest

The Withdrawal Sequence

Once income stops arriving from work it has to come from somewhere, and the order you draw from accounts changes what you pay over a retirement. The conventional answer is to spend taxable accounts first, traditional accounts next, and the Roth last, on the logic that the tax-free account should compound as long as possible. It is a reasonable default and for many people it is not the best available answer.

Continue readingShow less

The reason is that spending only from taxable accounts produces artificially low income for several years, wasting the low brackets, and then leaves a large traditional balance to come out later at higher rates. Drawing from more than one account type in the same year, in deliberate proportions, can produce a smoother income line and, for many households, a lower total. It is more work and it requires knowing the target before the year starts.

Filling brackets rather than emptying accounts

The approach we prefer starts with a target for taxable income in a given year, set by where the brackets and thresholds sit, and then works backward into which accounts the money comes from. Some years that means a conversion on top of spending. Other years it means drawing more from the traditional account and less from taxable. The target changes as the picture does.

Thresholds that do not move gradually

Several things in retirement change abruptly at an income level rather than gradually. Medicare surcharges work this way, and the surcharge in a given year is based on income reported two years earlier, so the decision and the consequence are separated by a gap most people do not see coming. How much of Social Security is taxable also depends on other income. Planning the year means watching those edges, not just the bracket.

A target set before the year
Deciding in January what taxable income should look like in December is what makes the rest of the sequence possible.
Medicare's two-year lag
Medicare premium surcharges are based on income from two years prior, so a high-income year has a cost that arrives later.
The survivor's brackets
After one spouse dies, the survivor generally files as single, on brackets roughly half as wide, which makes the joint years more valuable than they look.

Generational Transfer

What your heirs receive is not the same as what you have. A dollar in a Roth arrives tax-free. A dollar in a traditional IRA arrives as ordinary income to someone who may be in their peak earning years, and most non-spouse beneficiaries have to empty the account over a compressed period. A dollar of appreciated stock in a taxable account generally arrives with its basis reset at death, and the gain you never realized is not taxed at all.

Continue readingShow less

That means the accounts are not interchangeable, and which one a person inherits matters. It also means the planning decisions made during your lifetime, particularly conversions, are partly decisions about your beneficiaries rather than about you. For couples in California, community property treatment can affect how basis resets on the first death, which is worth understanding before it happens rather than after.

Matching assets to beneficiaries

If some of the estate is going to charity and some to children, which account each comes from changes the result substantially. A charity pays no tax on a traditional IRA it receives, and a child does. Appreciated stock left to a child gets a reset basis, and given to charity avoids the gain either way. Sorting this deliberately usually costs little, and it is frequently left to chance.

The paperwork that actually controls

Retirement accounts pass by beneficiary designation, not by will, and the designation on file at the custodian is what governs regardless of what any other document says. We see forms naming a former spouse, forms naming an estate, and accounts titled outside a trust that was supposed to hold them. We check this against your documents and coordinate with your attorney where something needs changing.

Basis that resets
Appreciated assets held in a taxable account generally receive a new basis at death, which is why unwinding every gain during life is not always right.
Accounts that do not
Traditional retirement accounts carry their deferred tax to whoever inherits them, on a timetable set by statute rather than by need.
Designations that override documents
The beneficiary form at the custodian controls the account, whatever your will or trust says, which makes it worth reading every few years.

Across the year

How the frameworks fit together

First quarter

Tax documents arrive and go to your tax preparer. We review last year's return once it is filed, because it is the single most useful document we see, and it tells us whether what we planned actually happened.

Second quarter

After the filing deadline we meet for the annual planning update. We confirm what has changed, refresh the projection with real numbers rather than estimates, and set the target for the year's taxable income.

Third quarter

Tax planning meetings begin in September. There is still time to act, and enough of the year has happened that the projection is reliable. This is when most conversion and gain decisions get made.

Fourth quarter

Execution, and the deadlines. Conversions, charitable gifts, and realized gains or losses have to be completed within the calendar year, and the last weeks of December are a poor time to be deciding rather than executing.

Year end

A short check-in to confirm everything intended was completed and to note what is carrying into next year. Then the cycle restarts with documents in the first quarter.

Boundaries

What we do not do

We do not prepare tax returns

We read them closely and we plan around them, but we do not file them. Your CPA does that, and we would rather coordinate with a good one than replace them.

We do not draft legal documents

Wills, trusts, and powers of attorney come from your attorney. Our role is making sure the accounts and designations match what those documents say, which is where the gaps usually are.

We do not forecast markets

We have no view worth acting on about what happens next quarter, and a plan that needs one is fragile. We build plans that work across a range of outcomes instead.

We do not hold your assets

Your accounts are held at Charles Schwab, in your name. We have authority to manage and to bill, and none to move money to anyone but you.

Case Studies

The frameworks applied

Hypothetical case study

Recently retired, staying put

Staying in California with $2 million in an IRA

A paid-off house, $3 million invested, and two adult children. The open question was never whether the money would last.
It was how much of it would reach the children, and what staying in California costs along the way.

Read the full analysis

Hypothetical case study

Approaching retirement, uncertain inheritance

Planning around an inheritance that may never arrive

Both 60, with $2.5 million invested and plans to spend the next decade living in different cities while their health allows it.
An expected inheritance complicated it, because planning around money that may not come is its own decision.

Read the full analysis

Hypothetical case study

Concentrated stock after a sale

Unwinding a position that is half the portfolio

At 55, recently out of a business he sold, with $12 million invested and more than half of it sitting in a single stock.
Diversifying meant realizing gains on a very low basis, so the question was over how many years rather than whether.

Read the full analysis

All case studies

The examples shown are illustrative and do not represent any actual client. The situations are constructed, and the figures are rounded and chosen for illustration. They are not a projection, a recommendation, or an indication of results any client did receive or should expect to receive. Individual circumstances vary, tax rules change, and the analysis appropriate to one situation will not apply to another. Financial North Partners and NewEdge Advisors do not provide tax, legal, or accounting advice. You should consult your own tax, legal, and accounting professionals before making decisions based on the strategies discussed.