When Is the Conventional Sequence Suboptimal?

The conventional withdrawal sequence (taxable first, tax-deferred second, Roth last) is elegant in its simplicity and works well for the majority of middle-income retirees. However, research in retirement finance has revealed scenarios where a different approach—withdrawing from all three account types proportionally—can produce better after-tax outcomes. This article explores the logic of proportional withdrawals, the conditions under which they outperform conventional sequencing, and how to evaluate whether your situation warrants deviation from the traditional approach.

Quick definition: Proportional withdrawal strategy means withdrawing from taxable, tax-deferred, and Roth accounts in proportion to their balances each year, rather than sequentially exhausting one type before moving to the next. For example, if your portfolio is 40% taxable, 40% tax-deferred, and 20% Roth, you withdraw 40%, 40%, and 20% of your annual need from each bucket respectively.

Proportional withdrawals can reduce lifetime tax liability in situations where rigid sequencing creates bracket mismatches, pushes retirees above income thresholds (IRMAA cliffs, Social Security taxation), or forces large distributions later that exceed optimal brackets.

Key takeaways

• Proportional withdrawals maintain consistent portfolio allocation across account types, which can reduce rebalancing friction and sequence-of-returns risk
• The strategy can outperform conventional sequencing when tax brackets change significantly during retirement or when high-income retirees face IRMAA cliffs
• Lower effective tax rates are often achieved by spreading withdrawals across account types rather than sequentially depleting one category
• Proportional withdrawals require more annual planning and tax modeling but can save $10,000–$50,000+ over a 30-year retirement in specific scenarios
• The approach works best for retirees with balanced account sizes; if one account type dominates (e.g., 80% traditional IRA), proportional approach offers less benefit

The Bracket Mismatch Problem

To understand when proportional withdrawals outperform, consider a concrete scenario:

The Scenario: High-income early retiree, age 56

• Taxable: $200,000 (cost basis $180,000, gains $20,000, all long-term)
• Traditional IRA: $2,000,000
• Roth IRA: $300,000
• Annual spending: $120,000
• No Social Security yet (deferred until 70)
• Tax bracket (no other income): Currently the 0% long-term capital gains bracket because ordinary income is minimal

Conventional Sequence Approach:

• Year 1: Withdraw $120,000 from taxable account

• Taxable income: ~$12,000 long-term gains (6% of portfolio realized)

• Federal tax: ~$0 (0% LTCG bracket)

• Roth/traditional accounts: Untouched

• Result: Stays in ultra-low bracket all year

• Year 2: Taxable account now has $80,000 remaining

• Withdraw remaining $80,000 from taxable account

• Then withdraw $40,000 from traditional IRA

• Taxable income: ~$8,000 (gains) + $40,000 (IRA) = $48,000

• Federal tax: ~$5,760 (12% on $48,000)

Proportional Approach:

• Years 1–2: Withdraw from all accounts proportionally
  • Total portfolio: ~$2.5 million (40/50/10 ratio roughly)
  • Year 1: $48,000 from taxable (~5% gain realized = $2,400 taxable), $60,000 from traditional IRA, $12,000 from Roth
  • Year 1 taxable income: $2,400 + $60,000 = $62,400
  • Year 1 federal tax: ~$7,488 (12% on $62,400)

At first glance, conventional sequencing (Year 1: $0 tax) outperforms proportional ($7,488 tax). But the story unfolds differently over time.

Conventional Sequencing, Years 3–10:

• Taxable account depleted by year 2
• Years 3–10: Withdrawing entirely from traditional IRA
• Taxable income stays around $120,000/year
• Effective tax rate on full $120,000: ~13.5%
• 8 years × $120,000 × 13.5% = $129,600 in taxes

Proportional Approach, Years 3–10:

• Withdraws from all three accounts proportionally
• Taxable income stays around $90,000/year (taxable income from traditional IRA + gains, minus Roth contributions which don't count)
• Effective tax rate on $90,000: ~11%
• 8 years × $90,000 × 11% = $79,200 in taxes

Over the 10-year window: conventional = $129,600 + $5,760 = $135,360 total tax. Proportional = $7,488 + $79,200 = $86,688 total tax.

Savings with proportional: $48,672 over 10 years.

The logic: by not exhausting the taxable account (and its tax-efficient long-term gains), proportional withdrawals reduce reliance on the traditional IRA, keeping ordinary income lower across all years. Conventional sequencing front-loads the tax-free long-term gains consumption, then forces high reliance on taxable ordinary income later.

Proportional Withdrawal Framework

When Proportional Withdrawals Win

Scenario 1: The IRMAA Cliff Manager

A 67-year-old couple (one claiming Social Security, one not yet) faces the following:

• Joint Social Security income (one spouse): $36,000
• Taxable, tax-deferred, Roth: $400,000, $800,000, $200,000 respectively
• Annual spending: $100,000
• IRMAA threshold (married): $194,000 (as of mid-2020s)

Conventional sequencing:

• Year 1: Withdraw $100,000 from taxable account

• Other income: $36,000 (Social Security)

• Total MAGI: $36,000 + $100,000 taxable gain (~$10,000) = $46,000

• Medicare premium: Standard

• Repeat for 4 years until taxable is depleted

• Year 5+: Traditional IRA withdrawals begin

• Other income: $36,000 (Social Security) + $64,000 (IRA withdrawal to meet the $100,000 spending) = $100,000

• Total MAGI: $100,000

• Still under $194,000 IRMAA cliff

This works, but it's fragile. If the couple's spending increases to $110,000 in year 5, they're now at $110,000 MAGI, $154,000 combined income (with Social Security taxation), pushing them above IRMAA cliffs and triggering surcharges.

Proportional approach:

• Years 1+: Withdraw proportionally from all accounts
• Taxable: 33% of portfolio
• Tax-deferred: 67% of portfolio
• Roth: 17% of portfolio
• Year 1: $33,000 from taxable, $67,000 from IRA (for spending only, no conversion), $0 from Roth
• Other income: $36,000 Social Security + $33,000 taxable gain (~$3,300 taxable) + $67,000 IRA = $106,300 MAGI
• Medicare premium: Standard (still under $194,000)

By withdrawing from the Roth (which doesn't count toward MAGI), the couple avoids triggering IRMAA in later years. The slight increase in early taxes is offset by avoided IRMAA surcharges later.

Scenario 2: The Early Retiree's Bracket Management (Age 55–72)

An early retiree, age 56, has:

• Taxable: $300,000 (20% gains)
• Traditional IRA: $1,500,000
• Roth IRA: $200,000
• Annual spending: $100,000
• Tax bracket goal: Stay in 12% federal bracket (ordinary income < $89,250 for married, married filing jointly)

Conventional sequencing:

• Years 1–3: Withdraw $100,000 from taxable (depletes by year 3)
• Years 4+: Withdraw from traditional IRA
• Taxable income from traditional: $100,000/year = 12% bracket

Proportional approach (20% taxable, 75% IRA, 5% Roth):

• Years 1+: $20,000 from taxable, $75,000 from IRA, $5,000 from Roth annually
• Taxable income: $2,000 gain + $75,000 IRA = $77,000
• Bracket: 12%

Both maintain the 12% bracket, so what's the difference? Market volatility. In a year when markets drop 20%, the proportional approach (holding equal amounts in all accounts) experiences less portfolio volatility because you're withdrawing from the largest account (traditional IRA). Conversely, conventional sequencing leaves you heavily exposed to the large traditional IRA that could suffer a downturn. Over a 20-year retirement, this volatility can translate to real dollars.

Real-world examples

Example 1: The Portfolio Rebalancer (Proportional Wins)

Raymond, 65, retires with:

• Taxable: $250,000 (cost basis $220,000, gains $30,000)
• Traditional IRA: $1,000,000
• Roth IRA: $250,000
• Total: $1,500,000
• Allocation: 16.7% taxable, 66.7% IRA, 16.7% Roth
• Annual spending: $90,000
• Tax situation: Married, taking Social Security ($48,000), no pension

Conventional approach:

• Year 1: Withdraw $90,000 from taxable

• Taxable income: $27,000 gain (9% ratio) + $48,000 SS = ~$75,000 MAGI (partial SS taxation)

• Fed tax: ~$6,750

• Year 3: Taxable depleted, switch to IRA

• Withdraw $90,000 from IRA

• Taxable income: $90,000 IRA + $48,000 SS = $138,000 MAGI

• Fed tax: ~$19,000

• Year 3-30: All traditional IRA withdrawals

• Average tax: ~$18,000/year over 28 years = $504,000 total tax

Proportional approach (16.7% each):

• Year 1-30: Withdraw $15,000 taxable, $60,000 IRA, $15,000 Roth
• Taxable income: $4,500 gain + $60,000 IRA + $48,000 SS = ~$112,500 MAGI
• Average Fed tax: ~$14,500/year over 30 years = $435,000 total tax

Tax savings: $69,000 over 30 years through proportional withdrawals. The benefit is modest here because Raymond's portfolio is already reasonably balanced, but it's still meaningful.

Example 2: The Imbalanced Portfolio (Conventional Wins)

Lisa, 62, retires with:

• Taxable: $150,000
• Traditional IRA: $3,000,000
• Roth IRA: $100,000
• Total: $3,250,000
• Allocation: 4.6% taxable, 92.3% IRA, 3.1% Roth
• Annual spending: $120,000

Conventional approach:

• Year 1: Withdraw $120,000 from taxable (will deplete by year 2)

• Taxable income: minimal

• Fed tax: minimal

• Year 2: Withdraw from IRA

• Repeats for 40 years

• Consistent 22% tax bracket

Proportional approach would allocate 4.6% of $120,000 = $5,520 from taxable, 111,000 from IRA. The traditional IRA is so large that proportional approach barely touches the taxable account—the benefits of proportional withdrawal are minimal because taxable account is dwarfed by the IRA. Conventional sequencing (deplete taxable first) is more straightforward and equally tax-efficient here.

The lesson: proportional withdrawals are most valuable when accounts are relatively balanced in size. If one account dominates (>70% of portfolio), proportional offers marginal benefit.

Common mistakes

Mistake 1: Switching to proportional without modeling the specific impact. Proportional withdrawals sound sophisticated, but they're not always better. Model your specific situation for 5–10 years under both strategies before committing. You might find conventional sequencing is better for you.

Mistake 2: Not accounting for rebalancing costs. Proportional withdrawals require you to rebalance to maintain allocation ratios. If your taxable account holds bonds and your IRA holds stocks, rebalancing might involve selling appreciated stocks (triggering tax) or buying losers. These costs can offset the proportional benefit. Calculate rebalancing tax drag.

Mistake 3: Ignoring sequence-of-returns risk optimization. Proportional withdrawals can help manage sequence-of-returns risk by forcing you to sell down the largest accounts (often stocks) during downturns. But this requires discipline and market timing skill. Many retirees execute proportional withdrawals poorly, selling losses and holding winners—the opposite of optimal.

Mistake 4: Using proportional approach without tax professional guidance. Proportional withdrawals involve more complexity: tracking multiple basis calculations, coordinating Social Security and Medicare, potentially dealing with quarterly estimated tax payments. Without a CPA's help, you might underpay taxes or miss deductions. The modest tax savings can evaporate in penalties and interest.

Mistake 5: Not revisiting the strategy annually. Market returns shift your allocation. If stocks drop 30%, your proportional ratio changes (IRA drops more if it's stock-heavy). Rerun your model annually; what was optimal one year might not be optimal the next. Flexibility is key.

Mistake 6: Over-complicating for marginal gains. If your model shows proportional withdrawal saves $500/year, the complexity cost might exceed the benefit. Stick with conventional if your savings are under 3–5% of your tax bill. The time and mental energy aren't worth a $500 gain.

FAQ

How do I model proportional vs. conventional withdrawal impact?

Use a spreadsheet to project 5–10 years of income under both strategies. For each year, calculate taxable income, federal tax, Medicare premiums (IRMAA), and Social Security taxation. Sum the total tax for each strategy. The higher-tax strategy is suboptimal. Many retirement planning software packages automate this. Consider consulting a CPA for personalized analysis.

If I do proportional, should I rebalance to maintain exact proportions?

Not necessarily exact, but aim to stay within 5–10% tolerance of your target allocation. Rebalancing every withdrawal is excessive and incurs frictional costs. Annual rebalancing is more typical and reduces tax drag while maintaining approximate proportions.

Can I use proportional withdrawal in some years and conventional in others?

Yes. This is actually a hybrid approach and can be powerful. In low-income years, use conventional sequencing (deplete taxable for tax-free gains). In high-income years (perhaps a lumpy expense or pension income spike), use proportional to spread tax impact. Flexibility is the advantage.

What if my tax situation changes (e.g., spouse passes away)?

Recalculate your optimal strategy immediately. Filing status, tax brackets, Social Security rules (spousal benefits), and Medicare rules change with life events. What was proportional-optimal might now be conventional-optimal or vice versa. Don't set it and forget it.

Does proportional withdrawal apply to required minimum distributions (RMDs)?

Not directly. RMDs must be taken from tax-deferred accounts (they're mandatory, not optional). But you can structure the rest of your withdrawals to be proportional. Take your RMD, then supplement with proportional draws from other accounts. This hybrid approach is common for retirees managing RMDs.

How does investment allocation factor into proportional withdrawals?

Your investment allocation and account-type allocation are separate. If your IRA is 100% stocks and your taxable account is 50% bonds, proportional withdrawal ratios (16.7% taxable, 66.7% IRA, 16.7% Roth) assume you're withdrawing proportionally from all accounts regardless of asset type. This can skew your overall portfolio allocation (more stocks withdrawn, fewer bonds). Address this by choosing which account type to hold which assets—this is a deeper optimization but often overlooked.

Related concepts

• Why Withdrawal Order Matters
• The Conventional Withdrawal Sequence
• Taxable Accounts First
• Tax-Deferred Accounts Second
• Roth Accounts Last
• Sequence of Returns Risk
• Withdrawal Strategies for Retirees
• Glossary: Portfolio Rebalancing

Summary

Proportional withdrawal strategy—drawing from all account types in proportion to their size each year—can outperform the conventional sequence in specific situations, particularly when retirees face bracket changes, IRMAA cliffs, or have balanced account sizes. The approach requires more annual tax modeling and coordination than conventional sequencing, but can save $10,000–$50,000+ over a 30-year retirement in optimal scenarios. However, proportional withdrawals are not universally superior; they work best for early retirees in low-income windows or those with complex tax situations. For many retirees, especially those with highly imbalanced portfolios, conventional sequencing remains simpler and equally effective. Annual review and flexibility—using hybrid approaches in specific years—often yields the best results. As rules change frequently, always confirm your personal strategy with the IRS or a qualified tax professional.

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