Withdrawal Sequencing

Can I Retire? Series — Part 8 of 12

You have three buckets of money. You need to fill a gap. Which bucket do you pull from first?

This question sounds minor. It isn’t.

The order you withdraw from your accounts — taxable, traditional, Roth — affects how much you pay in taxes, how long your money lasts, and how much you leave behind. Get it right and you could add years to your portfolio. Get it wrong and you’ll pay tens of thousands more in taxes than necessary.

The calculator on caniretire.app lets you choose your withdrawal sequence. Here’s how to think about which one to pick.

The Conventional Wisdom

The traditional advice is simple: withdraw in this order.

1. Taxable accounts first. Use your brokerage accounts, savings, and other non-retirement money. You’ll pay capital gains on the growth, but the rates are favorable (0%, 15%, or 20%), and you preserve the tax-advantaged growth in your retirement accounts.

2. Traditional accounts second. Once taxable is depleted, pull from your 401(k), traditional IRA, and other pre-tax accounts. You’ll pay ordinary income tax on every withdrawal.

3. Roth accounts last. Save your Roth for the end. It grows tax-free, withdrawals are tax-free, and there are no RMDs (for Roth IRAs). Let it compound as long as possible.

This sequence — Taxable → Traditional → Roth — is the default recommendation because it maximizes tax-deferred and tax-free growth. It’s sensible, it’s simple, and it works for many people.

But it’s not always optimal.

Why the Conventional Wisdom Can Be Wrong

The problem with “Traditional last” is RMDs.

At age 73, you’re required to start withdrawing from traditional accounts whether you need the money or not. If you’ve let your traditional accounts grow untouched while spending down taxable and Roth, you might hit 73 with a massive traditional balance — and massive required withdrawals.

Those RMDs are taxed as ordinary income. A large enough RMD can push you into higher tax brackets, increase your Medicare premiums (through IRMAA surcharges), and even make more of your Social Security taxable.

The conventional wisdom can create a tax time bomb.

Alternative Approaches

Traditional first (Traditional → Taxable → Roth). Draw down traditional accounts early, especially in years when your income is low. This reduces future RMDs and takes advantage of lower tax brackets before Social Security kicks in. The trade-off: you pay taxes now instead of later, and you lose some tax-deferred growth.

Roth first (Roth → Taxable → Traditional). Rarely optimal, but there are scenarios: if you expect much higher tax rates in the future, or if you have specific years where you need income that won’t push you into higher brackets or affect ACA subsidies. Generally not recommended as a default strategy.

Proportional withdrawals. Pull from all three buckets in proportion to their balances. If you have 50% traditional, 30% taxable, and 20% Roth, each withdrawal comes from all three in that ratio. This maintains your asset location balance but isn’t tax-optimized.

The Smart Middle Ground: Tax Bracket Management

The most sophisticated approach isn’t a fixed sequence at all. It’s dynamic: withdraw from whichever account makes sense given your tax situation that year.

Here’s the idea:

Fill up lower tax brackets with traditional withdrawals. If you’re in the 12% bracket with room before hitting 22%, pull enough from traditional accounts to fill that space. You’re paying 12% now instead of potentially 22% or more later (via RMDs).

Use taxable for additional needs. Once you’ve filled the bracket, cover remaining expenses from taxable accounts (where you pay favorable capital gains rates) or Roth (tax-free).

Consider Roth conversions. If you have room in a low bracket, convert traditional money to Roth. You pay tax now at a low rate, and that money grows and withdraws tax-free forever. This is especially powerful in early retirement before Social Security starts.

This approach requires more attention — you’re making decisions year by year — but it can save substantial money over a 30-year retirement.

What the Calculator Lets You Do

The caniretire.app calculator offers several withdrawal sequence options:

Taxable → Traditional → Roth (conventional)

Traditional → Taxable → Roth (RMD-aware)

Roth → Taxable → Traditional

Proportional

It models taxes based on your withdrawals and accounts for RMDs when they kick in. You can run multiple scenarios with different sequences and see how they affect your success rate and ending balance.

Try a few. The differences might surprise you.

Some Rules of Thumb

If your traditional balance is large relative to your other accounts: Consider drawing it down earlier or doing Roth conversions. You’re at risk of RMD problems later.

If you’re retiring early (before 59½): You’ll likely rely on taxable accounts first anyway, since retirement account withdrawals may face penalties. Plan for a bridge strategy.

If you expect to be in a higher bracket later: Traditional withdrawals now (at lower rates) make sense. Pay taxes while they’re cheap.

If you expect to be in a lower bracket later: The conventional wisdom (taxable first) probably applies. Defer traditional withdrawals until your income drops.

If you want to leave money to heirs: Roth is most valuable for inheritance (tax-free to beneficiaries). Preserve it if legacy is a priority.

The Honest Truth

Withdrawal sequencing is one of those areas where the “optimal” answer depends on predicting the future: future tax rates, future market returns, future spending, your lifespan.

Nobody knows these things.

What you can do is run scenarios, understand the trade-offs, and make a reasonable choice. Any of the standard sequences will work. The differences matter, but they’re not the difference between success and failure — they’re the difference between good and slightly better.

Don’t let perfect be the enemy of good. Pick a sensible sequence, revisit it periodically, and adjust as circumstances change.

Your Homework

Look at your bucket balances from Part 5. Which is largest? If traditional dominates, think about whether RMDs could become a problem.

When you run the calculator, try at least two different withdrawal sequences. Compare the success rates and median ending balances. See how much it matters for your specific situation.

In Part 9, we’ll look at what’s happening under the hood of the calculator: how it uses real historical data and Monte Carlo simulation to stress-test your plan against 99 years of market history.

Next: Part 9 — Why This Calculator Uses Real History