where to withdraw depending on age?

[mistymoney]

this is likely a covered topic, so please point me to any threads that may already have the info and discussions, but as I'm looking at my last year or two at working, I'm wondering about what to withdraw from where and how my age may impact those decisions.

When I retire, I am estimating I'll have 100-150k in roth, 1300-1400k in 401k and rollovers, and maybe 40k in HSA. If things stay at least even keel, I'll be retiring mid 23 at 56. I don't have much in taxable, but the EF is getting chunky at about 30k, hoping for about 60k when I retire. I'll ignore that and the HSA, leaving those for the unexpected in health or life events.

I have a side job that brings in 15-20k/year and I plan to keep that going (if I can) until I take SS. And I am estimating a start budget of about 70k/year.

So how can I be tax efficient?

Originally, I thought to leave Roth untouched and use only 401k rollover to supplement earned income, but then I started thinking about being more efficient tax-wise.

So - I thought to take my earned money and 401k withdrawals to fill up to the 12% tax bracket and the rest from roth, so say I earn 15k, have 12k deduction, take 37k from IRA, and take 6k from roth. Very tax efficient! or so I thought.

But looking more into this, I would be at <3% withdrawal from 401k, and 6% from Roth - meaning Roth will get exhausted while 401k builds up in time for RMD and higher taxes!

So now, I'm wondering if I should funnel any earned money into the Roth up to the max, and take the 401k money for the rest and actually build up the roth while I still had earned income. Paying more in taxes but then moving to the tax efficient scenario after qitting side gig, at which point RMD would be about or more what I needed anyway. so - I'd have to take no matter what, and anything more I needed from roth would be at the sustainable 4% or less. or not! and it wouldn't matter because I'd be 10+ years down the road.

Then there is making a one or two or three big tax year to pay off mortgage, taking out of 401k like 100k more than expenses to pay off, have and live on a lot less thereafter, and qualify for things like ACA subsidies and senior property tax freezes, etc. would be up to 35% tax rate for 1 year, 32% for 2 years, or 24% to spread over 3 years.

Which way to go?

So many potential paths!

[stoaX]

If it helps simplify your thinking, I would take RMDs out of the equation since you are 17 or so years away from that and who knows how tax laws will change by then. 

Regarding the emergency fund, if using some of that money to prevent you from losing ACA subsidies or going over a tax cliff, I would use it. 

[Greystache]

In my run up to retirement, I started putting money into cash or near cash vehicles like CDs and a muni bond fund so I would have a source of after tax funds.  I was not able to contribute any more to Roth funds because of income restrictions.  You don't have much time left to build up after tax money.  I did find a pleasant surprise when I rolled over my 401K into an IRA. I learned that somewhere along the way, I had over contributed to 401K and had some $60K of after tax money in there. When I did my roll-over, i put that portion in a roth. It might be worth checking your 401K to see if you have any after tax money there.
There is a thing you can do to reduce your MAGI in retirement.  If you are healthy, you can get an ACA HD bronze plan with an HSA.  You can then contribute about $4k per year to the HSA ($8K if married) and reduce your taxable income by the same amount.

[zolotiyeruki]

You're in luck--there's a tool out there to answer just this question:  the Internet Optimal Retirement Planner, or i-ORP.  Plug your numbers in, and it'll do a bunch of number crunching to optimize your withdrawal strategy.

EDIT:  i-ORP may be outdated--I just ran a report, and it referenced the 15% tax bracket, which hasn't existed for a few years now.

[Catbert]

If I'm reading this right you've got 1.3 or 1.4 million in 401ks.  If so, you have a tsunami of RMDs coming in only 17 years.  If you do nothing you could easily have over 3 million by RMD age and have an RMD around 120K.  Think about what that would do to your taxes. (I'm obviously using very round numbers.)  I would hit withdrawals/conversion harder than your initial plan.  As graystashe says maybe focus more on putting money into cash/bonds the next few years rather than more 401K.

Two other things you may not have realized.  If you make more than 91K (181K is married) you'll pay higher Medicare premiums.  These thresholds are indexed for inflation.  Also if your MAGI goes over 250K you'll owe an extra 3.8% on investment income over 250K.  This is NOT indexed for inflation so it will apply to more and more people and more and more income over time.  You should learn more about both these topics and determine how much they might impact you.   

I would do withdrawals and conversions based on your best guess of long term taxes rather than how much you need to spend in a given year.

[MDM]

Roth IRA conversion - Bogleheads is worth digesting.

I-ORP's reference to the 15% bracket is its assumption that tax brackets revert in 2026.  I-ORP is a good tool, but does make some assumptions that may or may not apply to every situation.  At the least it is good for suggesting things a user may not have considered.

[Villanelle]

You're in luck--there's a tool out there to answer just this question:  the Internet Optimal Retirement Planner, or i-ORP.  Plug your numbers in, and it'll do a bunch of number crunching to optimize your withdrawal strategy.

EDIT:  i-ORP may be outdated--I just ran a report, and it referenced the 15% tax bracket, which hasn't existed for a few years now.

Wow.  Thanks for this resource.  I had no idea this existed and am looking forward to playing around. 

[EvenSteven]

You're in luck--there's a tool out there to answer just this question:  the Internet Optimal Retirement Planner, or i-ORP.  Plug your numbers in, and it'll do a bunch of number crunching to optimize your withdrawal strategy.

EDIT:  i-ORP may be outdated--I just ran a report, and it referenced the 15% tax bracket, which hasn't existed for a few years now.

Wow.  Thanks for this resource.  I had no idea this existed and am looking forward to playing around.

I haven't used it, but one thing others have said to watch out for is to make all your accounts have the same asset allocation, otherwise it will be biased in trying to allocate money based on asset allocation rather than tax treatment.

[Watchmaker]

Last year we had a good discussion about optimizing Roth conversions in retirement which is relevant to your situation: https://forum.mrmoneymustache.com/post-fire/trad-to-roth-conversion-more-or-less/