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I vote with meddoc for option 1.

Your question requires some calculation to answer for your personal situation. I recommend that you write yourself a spreadsheet to do that.

I retired in 1993 at age 53 with about equal amounts in my IRA and my taxable account. The taxable account and my little pension have supported me for seven years, without touching the IRA which has tripled. Now, to my mild surprise, I find that my accounts have grown so much that it benefits me to take little optional withdrawals -- around 2% a year -- from my IRA in my 60's. This sacrifices some tax free growth to take the edge off some of the high income taxes facing me starting at age 70. There would not have been any benefit to taking optional withdrawals when my accounts were smaller. So, if you don't want to do the calculations, the safest course seems to be to preserve the untaxed dollars as long as possible. You need to consider also what you intend for your heirs, if any. Leaving the taxable account to someone gives that heir the advantage of stepping up his basis in those assets from your basis to current market value at the time of inheritance, avoiding capital gains taxes on your gains. Leaving the non-taxable account to someone may allow the tax-deferred status of the account to be preserved for many years. Either way, you have inheritance taxes to consider. Your call.

Chips, who congratulates you on your preparation for retirement
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