2020 Volume 23 Issue 2



and your Retirement Objectives

On December 20, 2019, the SECURE (Setting Every Community Up for Retirement Enhancement) Act became law after broad bi-partisan Congressional support. SECURE changed many aspects of retirement accounts, benefitting some areas and harming others. Among the benefits are an expansion of the ability to contribute to IRAs and an increase in the age at which the first Required Minimum Distribution (RMD) must be taken. On the other side of the coin, the law shortens the timeframe for heirs to take distributions from their inherited Individual Retirement Accounts (IRAs).[1]

This article summarizes how prescriptive analytics techniques are used in practice by retirees to maximize retirement portfolio longevity. The authors then contribute to this applied research by assessing how the SECURE Act affects the value of a retiree’s bequest.


Thanks to overall improvements in health and wellness, as well as medical advances, retirees in the U.S. are living longer.[2] With minimal exceptions, prior to passage of the SECURE Act, the age mandated for initiating Required Minimum Distributions (RMDs) was the year the account holder turned 70-1/2.[3] The SECURE Act recognizes that people are living longer and has increased that age to 72 for those born after June 30, 1949.

There are many reasons a retiree might want to delay taking distributions from a retirement account. Those reasons include the retiree not needing the extra taxable income and a desire to bequeath assets to an heir with a lower marginal tax rate who could realize more after-tax dollars from the withdrawal than the retiree.

The SECURE Act has changed the rules for heirs inheriting IRAs. Under the former law, RMDs from an inherited IRA are based on the heir’s life expectancy. For instance, an heir who is 25 years old when they inherit an IRA is expected to live another 58.2 years, so that heir would only be required to withdraw less than 2 percent in the first year of holding the IRA.[4] This former law extended the benefits of tax-deferred returns of a traditional IRA, and the tax-exempt returns of a Roth IRA, and is often cited by professional wealth managers as an important way to pass wealth between generations.[5]

The SECURE Act has significantly reduced the amount of “stretch” in inherited IRAs to non-spousal heirs,[6] requiring distributions over a maximum of ten years from a tax-deferred traditional IRA or a tax-free Roth IRA. At the end of the 10 years, all assets from the inherited IRA must have been distributed. Because of the change in distribution period, both traditional IRAs and Roth IRAs will lose out on many years of tax-free growth formerly allowed by the prior, and more lenient, distribution rules. In addition, withdrawals from traditional IRAs are taxed as ordinary income, so withdrawing funds over ten years will accelerate taxes on the distributions.

Related Research

A significant body of work exists proposing techniques to increase portfolio longevity or bequests to a retiree’s heirs. One of the earliest works was done by Horan using a so-called “informed” strategy.[7] Under a progressive income tax system, Horan showed that it is more efficient to withdraw from tax-deferred accounts up to the top of a tax bracket. His paper showed how an “informed” strategy could extend the longevity of a portfolio when compared with a portfolio where withdrawals were sequential. Sequential withdrawals, often called “common rule withdrawals,” are advocated by large financial services firms such as Vanguard[8] and Fidelity.[9] The “common rule” withdraws assets as needed to meet a desired retirement income level in the following sequence:[10]

  1. First, withdraw the Required Minimum Distributions (RMDs) from tax deferred accounts. These accounts include 401(k)s, 403(b)s, 457 plans, as well as Individual Retirement accounts (IRAs) created with direct contributions or rollovers from employer provided retirement plans.
  2. Next, withdraw funds from taxable brokerage accounts, until they reach a $0 balance.
  3. Third, continue to withdraw funds from tax deferred accounts (IRAs, 401(k)s, 403(b)s, 457 plans), until they reach a $0 balance. Because withdrawals from each of these accounts is treated as ordinary income, there is no difference in taxation if funds from one tax deferred account are used before another.
  4. Lastly, withdraw funds from tax free accounts, like Roth IRAs, Roth 401(k) and Roth 403(b). If these funds reach a $0 balance, there are no remaining retirement savings. Then, only lifetime annuities, such as pensions and social security, are available to cover retirement expenses.

A free interactive web calculator to see this sequence for a hypothetical retiree is available at https://etfmathguy.com/optimal-retirement-income-calculator/.

Sumutka, Sumatka, and Coopersmith showed how the common rule could be improved using more sophisticated strategies coupled with a more complete model of tax law.[11] The potential benefit of early or pre-retirement Roth conversions were illustrated by Cook, Meyer, Reichenstein.[12]

One of the most sophisticated models developed thus far, which includes uncertain future tax rates and investment returns, was described by Brown, Cederburg, and O’Doherty.[13] One of their key findings was the significant benefit of Roth IRA assets for higher net worth retirees. DiLellio and Ostrov demonstrated a custom optimization technique that seeks the most efficient use of IRA and Roth assets in the presence of other income sources, like social security, pensions and other dividend generating assets.[14] The model described in the next section extends these works by updating retirement objective coefficients for the SECURE Act.

The stretch IRA and Estate Planning

A major tenet of estate planning is to maximize the value of the assets distributed to heirs. One way this is done is by taking full advantage of tax law. A model developed by DiLellio and Ostrov that covers approximately 99.9 percent of estates,[15] estimates the after-tax value of an estate distribution (W) as[16]

W = Wbrokerage + (1/a) [WIRA (1 – τheir) + WRoth].        (1)

Here, Wbrokerage is the value of assets in the retiree’s taxable brokerage account. If these assets had been sold by the retiree prior to his passing, those assets would have generated a capital gains tax, which can be significant if the assets had greatly appreciated since acquisition. However, in current tax law there is a provision that allows for a step-up in basis which resets the cost basis of assets at the date of death of the decedent. Thus, the inheritor of the assets will have no taxable gain if the assets are immediately sold and a smaller gain than would have been realized without the rules allowing for a step up.

WRoth is the value of assets in the retiree’s Roth IRA accounts, and distributions from those assets are non-taxable to the recipient based on current tax law.

The next term, WIRA is the value of assets in the retiree’s IRA accounts, including traditional and rollover accounts funded with pre-tax funds. This term also includes other accounts that hold tax-deferred assets, such as 401(k), 403(b) and 457 plans. The value of such accounts is reduced by the marginal income tax rate of the retiree’s heir, τheir. If the heir’s tax rate is lower than the retiree’s marginal income tax rate, then the heir will have more after-tax dollars to spend from the IRA than the retiree would have had. At the extreme, charitable organizations have τheir = 0, which means that when they withdraw the IRA assets left to them, they get the full fair market value to use for their charitable purpose.

The term a is a discount rate associated with the ability for an heir to “stretch” their inheritance in an inherited IRA. Appendix 3 of DiLellio and Ostrov showed this value to be as small as 0.75 for the youngest of heirs using continuous time differential calculus.[17] This calculation is revisited in the next section using a discrete time model under the SECURE Act’s new 10-year limit.

The Effect of Reducing the Stretch IRA

To assess the value of the stretch IRA to an estate’s value, the author’s developed a discrete 10-year model under the following assumptions:[18] 

Table 1: Parameter Baseline

In this model, the authors assume that the heir is going to receive an IRA or Roth IRA which will be removed from the account at the end of a 10-year period, the maximum period allowed under the SECURE Act. All dividends and interest are re-invested until the ultimate withdrawal. Based on those assumptions, the present value of the account, which will have grown to 216 percent of its initial value at the end of year 10, will be 161percent of the initial value. To put that into more easily understood numbers, a $1 IRA will have grown to $2.16, which has a present value at a 3 percent discount rate of $1.61.[19]

The authors also examine if the same inheritance were in a taxable brokerage account, with bond coupon payments taxed at ordinary income rates and stock dividends qualified to be taxed at capital gains rates. That account will have grown to 189 percent of its initial value, and its present value will be 141 percent of its initial value.

The comparison of the two present values is instructive: the taxable brokerage account is worth 87.8 percent as much as the IRA account. Before the passage of the SECURE Act, the same scenario would have shown the taxable brokerage account worth only 75 percent of the amount of the IRA.[20] The advantage of the IRA has shrunk from 33 percent higher than the brokerage account to 13.9 percent higher than the brokerage account.

In summary, leaving the money in an IRA account for 10 years is still a superior strategy, but the difference has been narrowed significantly by the SECURE Act.

Sensitivity Analysis

It is instructive to alter the model’s parameters to show which ones are most important in affecting portfolio value. The authors looked at each value individually, leaving the remaining parameters unchanged. The results of this analysis appear in Table 2, which excludes inflation, which had no effect on the results.

Table 2: Parameter Changes for Sensitivity AnalysisThe results appear in the tornado chart in Figure 1, where the centerline corresponds to the baseline result of IRA assets increasing by 13.9 percent when held and reinvested over 10 years, rather than invested in a taxable account.

Chart 1: Tornado Chart on Reduction of Estate IRA Value due to the SECURE Act

As shown in Figure 1, variation of the capital gain tax rate had the largest effect on the benefit from using the 10-year period permitted by the SECURE Act. Increasing this tax rate from 15 percent to 20 percent increases this benefit from 13.9 percent to 17.2 percent, consistent with the well-known benefit of tax deferred and tax exempt investing in a traditional or Roth IRA. Stock returns had the next most significant effect, again amplified by the benefit of tax deferred and exempt investing. Increasing the income tax rate of the heir and bond returns had smaller effects, where higher rates and returns also increased the benefit of stretching the IRA over 10 years. The smallest effect was due to the asset allocation increase, which had an inverse effect. Increasing the stock bond allocation from 60/40 to 80/20 decreases the benefit from the tax deferred investing. This is explained by our assumption that stock investments gave rise to qualified dividends (taxed as capital gains), but bond coupon payments were taxed as ordinary income at the heir’s tax rate.


Inherited IRAs offer additional value when inherited by permitting continued tax-deferred or tax-exempt investment returns. In this article, the authors discussed the effect of the SECURE Act on the “stretch” provision of inherited IRAs. We revisited an existing model’s results to re-assess the value of the “stretch” provision, which has been reduced to 10 years. We find the additional value to the heir is reduced from about 33 percent to about 14 percent. The authors also showed that it was possible for an heir to boost the value of an inherited IRA by a few additional percentage points over our baseline when their tax rates and/or investment returns are increased. Overall, leaving the money in an IRA account for 10 years is still a superior strategy, but the difference has been narrowed significantly by the SECURE Act. 


This article is for informational purposes only. It is not intended to provide tax, legal, or accounting advice. You should consult with a tax, legal or accounting professional before engaging in any transaction. 


This research was supported by the Julian Virtue Professorship Endowment at the Graziadio Business School, Pepperdine University.


[1] Fidelity. (n.d.) “SECURE Act becomes law.” Fidelity.com. https://www.fidelity.com/go/secure-act-faqs

[2] Pampuro, A. (2019, June 20). “Census: American Population Is Living Longer.” Courthouse New Service. https://www.courthousenews.com/census-american-population-is-living-longer/

[3] The intention of the RMDs is to reduce tax-deferred growth of IRA balances, forcing retirees to withdraw a percentage of their IRA assets based on their life expectancy.

[4] IRS Publications (n.d.) “Publication 590-B (2019), Distributions from Individual Retirement Arrangements (IRAs).” IRS.gov. https://www.irs.gov/publications/p590b, Table I

[5] DeMuth, P. (2020). The Overtaxed Investor: Slash Your Tax Bill & Be a Tax Alpha Dog. CWM LLC, Los Angeles, California ISBN 978-0-9970596-2-5.

[6] Slott, E. (2020, January 30). “What will replace the stretch IRA?” InvestmentNews.com. https://www.investmentnews.com/what-will-replace-stretch-ira-187479

[7] Horan, S. M. (2006). “Withdrawal Location with Progressive Tax Rates.” Financial Analysts Journal, vol. 62, no. 6: 77-87.

[8] Jaconetti, C. M., & Bruno, M. A. (2008). Spending from a portfolio: Implications of withdrawal order for taxable investors. Vanguard Research, 1–13.

[9] Fidelity. (2014). Detailed methodology: Fidelity retirement income planner, Fidelity Investments, accessed April 2020, available at http://personal.fidelity.com/planning/retirement/pdf/rip_methodology.pdf.

[10] ETFMathGuy. (n.d.) “The Common Rule for Retirement Account Withdrawals.” ETFMathGuy. https://etfmathguy.com/optimal-retirement-income-calculator/the-common-rule-for-retirement-account-withdrawls/

[11] Sumutka, A. R., Sumutka, A. M., & Coopersmith, L. W. (2012). “Tax-Efficient Retirement Withdrawal Planning Using a Comprehensive Tax Model.” Journal of Financial Planning, April: 41-52.

[12] Cook, K. A., Meyer, W., & Reichenstein, W. (2015). “Tax-Efficient Withdrawal Strategies.” Financial Analysts Journal, vol. 71, no. 2: 16-29.

[13] Brown, D. C., Cederburg, S., & O’Doherty, M. S. (2017). “Tax Uncertainty and Retirement Savings Diversification.” Journal of Financial Economics, 126:3, P. 689-712.

[14] DiLellio, J. A., & Ostrov, D. N. (2017). “Optimal Strategies for Traditional versus Roth IRA/401(k) Consumption During Retirement.” Decision Sciences, vol. 48, pp. 356- 384.

[15] In 2020, $11.58 M was the per person limit to avoid estate taxes, which are triggered in about 0.1% of all estates. https://www.taxpolicycenter.org/taxvox/only-1700-estates-would-owe-estate-tax-2018-under-tcja

[16] DiLellio, J. A., & Ostrov, D. N. (2018). “Constructing Tax Efficient Withdrawal Strategies for Retirees with Traditional 401(k)/IRAs, Roth 401(k)/IRAs and Taxable Accounts”, Proceedings from the AFS Annual Meeting, Chicago, IL.

[17] Ibid.

[18] The interested reader can test a different set of assumptions by contacting the authors to request a copy of their model.

[19] For those carefully checking results, the $1.61 is rounded. In the actual calculations, the number is $1.60644… The $1.41 is also rounded, and its actual “in calculation” number is 1.40994… This has an effect when calculating the advantage of the IRA under the SECURE act.

[20] DiLellio and Ostrov (2018) showed this result.

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Authors of the article
James DiLellio, PhD, MBA
James DiLellio, PhD, MBA

James A. DiLellio, PhD, MBA, is an Associate Professor of Decision Sciences in the Graziadio School of Business and management at Pepperdine University.  He holds a PhD in Applied Mathematics from Northwestern University, and a MBA from Pepperdine University. His current research interests are primarily in the area of nonlinear optimization, simulation, and Kalman filtering techniques for modeling investment problems. The application of this research covers portfolio management, retirement planning, commodity price modeling, and the analysis of investment strategies. He has published papers in Energy Economics, Journal of Economics and Finance, Journal of Investing, and Financial Services Review.

Michael D. Kinsman, PhD, CPA
Michael D. Kinsman, PhD, CPA
Michael D. Kinsman, PhD, CPA, is a professor of finance and accounting at the Graziadio School of Business and Management. A former systems analyst for General Electric Corporation, a financial analyst for Pacific Telephone, and a consultant for a variety of large and small firms, Dr. Kinsman operates a CPA and consulting firm in Laguna Beach. He has written and lectured on a variety of subjects and has been published in the Journal of Finance, the Journal of Accountancy, and other periodicals.
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