The complexity of retirement distributions:

It won't be long before a lot of people are taking distributions from a myriad complexity of retirement plans, taxable accounts, Traditional IRAs and Roth IRAs, and they should be looking for guidance on where the money should come from first. There is little research and even less agreement on how this should be done.

We are developing a decision matrix which takes a lot of things into account before you can decide where to take your initial distributions. For example: Stocks or funds with a high tax basis might be more attractive to liquidate than IRA assets, but stocks or funds with a low tax basis might be profitably held until the first spouse dies, giving the second spouse a step-up in basis that can really enhance tax-efficiency going forward.

Tax-inefficient investments like taxable bonds are most profitably stashed in the IRA. But as you liquidate the IRA, you are also reducing your capacity to deploy those tax-inefficient investments where they belong. So you have to keep an eye on your IRA "capacity" in relation to the percentage of taxable bonds in the portfolio.

How you leave any leftover assets to heirs at death is another consideration. If the next generation of beneficiaries is quite young, then leaving a stretch-out IRA might be more efficient than leaving assets from the taxable account. However, we are not optimistic, given our current budget deficit, that Congress will maintain our current tax rates, and that money inside a retirement plan is more subject than outside money to the government's taxing whims. This would argue for taking money out of the IRA first, while the getting is good.

If there are estate tax liquidity issues, then it might be beneficial to avoid depleting the taxable accounts, since those assets would receive a step-up in basis, and no income taxes would have to be paid by the heirs to get this money. Withdrawing money from a traditional IRA to pay estate taxes would trigger additional income tax payments.

We look at distributing (rather than reinvesting) dividends and capital gains distributions from the taxable accounts, and considers whether clients have capital loss carry-forwards and/or realized capital losses for the current year (which would suggest taking capital gains from the taxable account sufficient to offset the losses). Beyond that, how important is creditor protection? (IRA assets are less vulnerable.) And are the heirs capable of managing a stretch IRA? Is there a high possibility that they would liquidate it in a few years, rather than stretching out the distributions and taking full advantage of the deferral?

There are two points here: First, that the source and sequence of retirement income distributions is a seriously complex planning issue, with too many variables to yield a pat, simple, one-sentence rule-of-thumb answer. Second: we may not have yet defined all the variables or outlined how they interact with each other.