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Static and Dynamic Tax Diversification of Withdrawals from Multiple Individual Retirement Accounts

Ganlin Xu
The Journal of Retirement Fall 2018, 6 (2) 75-87; DOI: https://doi.org/10.3905/jor.2018.1.042
Ganlin Xu
is CIO at GuidedChoice.com in San Diego, CA
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Abstract

This article shows why diversified simultaneous retirement funding drawn from accounts with differing tax treatments will save more on taxes than sequential withdrawal. We utilize dynamic programming to quantify the optimal funding under the assumption that the goal is to maximize the total discounted after-tax consumption and bequest amounts. The dynamic programming setting uses the actual tax schedule, considers the required minimum distribution and life expectancy, and constrains consumption with upper and lower bounds. We also find the optimal funding through static diversification, a simple optimization schema. We compare the static and full dynamic programming solutions in two cases, one for a single filer and another for a married joint filer. The static and the full dynamic programming solution differ more in the single filer case than in the married joint filer case. The static optimal withdrawal is close to sequential withdrawal. The full dynamic programming’s optimal withdrawal is close the sequential withdrawal when both types of accounts have a substantial balance.

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The Journal of Retirement: 6 (2)
The Journal of Retirement
Vol. 6, Issue 2
Fall 2018
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Static and Dynamic Tax Diversification of Withdrawals from Multiple Individual Retirement Accounts
Ganlin Xu
The Journal of Retirement Oct 2018, 6 (2) 75-87; DOI: 10.3905/jor.2018.1.042

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Static and Dynamic Tax Diversification of Withdrawals from Multiple Individual Retirement Accounts
Ganlin Xu
The Journal of Retirement Oct 2018, 6 (2) 75-87; DOI: 10.3905/jor.2018.1.042
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  • Article
    • Abstract
    • SEQUENTIAL WITHDRAWAL VERSUS DIVERSIFICATION
    • DYNAMIC AND STATIC DIVERSIFICATION
    • PARTITIONING INTO DISCRETE STATES
    • CASE STUDIES
    • CONCLUSION
    • ACKNOWLEDGMENTS
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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