On November 3, 2025, I presented at the FPA (Financial Planning Association) research showcase. Ed McQuarrie from Santa Clara University and Philip Goldfeder from Northwestern University also contributed to this work. Our presentation evaluates Roth conversions and early account distributions to boost after-tax retirement and taxable wealth. Our work was motivated by our previously published research and Laura Saunders’ WSJ article “When Paying More Tax, Not Less, Is the Smart Play”. In this post, we highlight the key findings of our presentation.
Seeking Tax Alpha
Our presentation at the research showcase considered three alternatives to increase after-tax wealth through tax efficiency from a single-year model. All alternatives assumed a “default” approach, called the Common Rule, which aims to defer taxes for as long as possible. We then considered three alternatives to meet a current-year $300,000 after-tax retirement income need while maximizing after-tax wealth.
- Common Rule, but also including Roth conversions
- Optimal Rule, which mixes tax-deferred, tax-exempt, and taxable income sources. This approach uses a general-purpose global non-linear optimization algorithm available in Excel spreadsheets.
- Optimal Rule, but also including the possibility of further improvements from Roth conversions.
We determined tax alpha as the additional investment returns needed to achieve the same after-tax wealth using the Common Rule. Our financial model included salient elements from the U.S. tax code.
- Income tax, capital gains tax, Net Investment Income Tax (NIIT), and Income-Related Monthly Adjustment Amount (IRMAA)
Our baseline model assumed a single retiree, age 62, who has not yet started any social security or pension income. We then considered a number of variations of this hypothetical example.
- Married Filing Jointly, different after-tax income needs, different tax rates for a non-spouse heir, and different cost bases in their taxable account.
Research Showcase Key findings
Consistent with our previously published work, we demonstrated that the tax alpha was significantly higher with the Optimal Rule than the Common Rule with Roth conversions. This is largely due to the capital gain tax triggered to pay the tax liability on the conversion from the taxable account.
Our next key finding was that there was more than one optimal solution. The image below shows that there is a range of distributions from a tax-deferred account and a Roth account that achieves the same after-tax wealth of $5,262,315.
We show that these alternative optimal solutions are due to exploiting tax-deferred income up to the 32% income tax bracket, which we assumed as the non-spouse heir’s marginal rate. Other key findings include that, depending on the model’s assumptions, tax alpha can range from 0.26% to 0.91% per year. Additionally, these tax alphas are largely insensitive to inflation rates and market returns, consistent with another previously published article.
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