Optimize Withdrawal Priorities for early retirement - always puts tax deferred as priority even before 59 1/2 age

The Optimize Withdrawal Priority evaluates, in your case, 625 permutations of withdrawal priorities which are all listed on the Optimization Results Table. For each of the 625, Pralana does a full scenario recalculation for all scenario years and saves the final effective savings for each of the 625. The table is sorted by this final effective savings by highest to lowest.

In your scenario 1, there is a pretty big 26% improvement in final effective savings on the optimized withdrawal priority (withdrawing from IRAs first) vs your current withdrawal priority.

Look at Review > Portfolio > Rates of Return.

Your taxable investment account has MUCH higher rates of return (7.32%) than your IRAs (4.7%). Thus it is more advantageous to draw from the IRA's first and let the taxable account continue to grow at 7.32% annually. Compounded over many years, 7.32% grows much faster than 4.7% and more than offsets the tax differences.

Consider doing this:

• Create a scenario 3
• Copy scenario 1 to 3 (all inputs).
• In scenario 3, manually move the taxable investment account to 3rd in the withdrawal priority order.

Compare the Review > Portfolio > Growth tabs for scenario 1 and 3. In the later years, the annual growth amount is much higher when you withdraw from the IRAs first and the taxable account later.

Of course, all of the above changes if you change the asset allocations in these accounts to make the RORs more even.

Hope this helps,
Charlie

Thank you Charlie. You are correct that the allocations in my taxable and tax deferred are very different with correspondingly different RoRs. That said, shouldn't I see a 10% early withdrawal penalty also factored into my taxes? I don't think I see that in

Yes, Pralana assesses the 10% early withdrawal penalty. You can confirm this as follows:

In your scenario 1, change the withdrawal priority so that Taxable is 3rd.

Confirm on the Cash Flow Statement that an unscheduled withdrawal is made from your IRA to cover the cash shortage in the early years. Note the cash shortage is based on cash inflows minus cash outflows (expenses) which includes taxes for the year.

Go to Review > Tax Forms and select 2026:

• See Schedule 2, line 8 "Additional tax on withdrawals from IRAs or other tax-favored accounts" which shows the 10% penalty
• This amount is included in the Schedule 2 total on line 21 and is included on the 1040 in line 23 "Other taxes from Schedule 2, line 21"

Now go to Form 1040:

• Click on the amount in line 4a. The pop-up Metric MRI will show your 2026 pretax Roth conversion (if any), which are not subject to the 10% penalty.
• Click on the amount in line 4c "IRA distributions (2025 unscheduled)". The popup explains why this 2025 unscheduled withdrawal is taxed in 2026.

For more info on the taxation of unscheduled withdrawals, please see:

• More > Resources > FAQ: Unscheduled Withdrawals
• More > Resources > Feature Voting: 1st item "Same-year taxation of unscheduled withdrawals"

Thank you!

@cstone -- I have a similar asset allocation strategy that has more bonds (and hence lower returns) in tax-advantaged accounts. The withdrawal order optimizer recommended switching from taxable first to tax-advantaged first once I hit the RMD age, but I see that a side-effect is that it appears to be shifting some stocks to bonds in my taxable account to keep my overall asset allocation on target. Does the optimizer take into account the LTCG tax as a result of rebalancing, or will that be part of the improvement you mention here? https://pralanaretirementcalculator.com/community/postid/5936/

Thanks,

Ted

@thromer Currently, Pralana Online does not calculated LTCG realized due to annual rebalancing. There is an open feature request for this and I have started working on it.

There is also a recent discussion on this topic here: rebalancing