Roth Conversion Ladder

Shift more into brokerage, it gives the most flexibility with capital gain harvest to control the reported income

There's a great ChooseFI episode that talks about this exact situation - what people were calling the "Middle Class trap" where it feels like if you have all your money in 401/trad IRA you're screwed. Turns out, you're not really.

They go over a few different scenarios that help you see how you can get around this problem with 72(t) SEPP:

Ep 553 | Deep Dive: Putting the Middle-Class Trap to Bed

Four case studies prove the middle-class trap is psychological, not financial. Your wealth isn't actually trapped — your thinking is.

ChooseFI

And this episode explains the Rule of 55 and 72(t) in more detail:

Ep 475 | How to Access Your Retirement Accounts Before 59.5 | Sean Mullaney

You can hit "Read Transcript" if you don't want to / can't listen.

TL;DR: Keep hitting your 401k and traditional if that's the right thing for you to do right now in the accumulation phase. (Not financial advice, not a tax advisor, etc. etc.)

TAXES, people! When you live off cash, then roth, then trad plans, you are heading toward the tax bomb. First, those with even incomes year to year have lower tax bills. I understand that making health insurance affordable is a conflicting need. In general though, the tax bomb occurs when your expenses are less than the amount you can spend. So the closer these numbers are, the less you need to worry. If you have a variance, consider doing a Roth conversion. Projection software such as Boldin or The Projection Lab (there are several out there) that can help show if your assets will spike over time. Boldin offers advice for Roth conversion, but doesn't consider things like if you have kids in college who would lose out of the tuition credit if you convert at the wrong time. So watch "Roth Conversion Pitfalls/Mistakes' youtube videos.

Also consider the rule of 55. If you leave your company after age 55, you may be able to withdraw 401k funds without an early withdrawal penalty. Find out if this is an option, if there are restraints such as having to do a lump sum or annual payments. One option might be to rollover funds into an IRA that you don't expect to spend before 59.5, leaving the balance for the penalty free withdrawals. No retraints, its ok to leave it all in the account. Rule of 55 does NOT apply to IRAs.

If you are able to take advantage of this, you may be able to even out your tax bill (especially if you get 0% cap gains rate on the brokerage).

Using up the brokerage first may make a lot of sense if you are buying ACA insurance and getting a subsidy. Otherwise, I would consider trying to take advantage of filling lower tax brackets.

It's hard to know since you're so far out, but it's fun to think about. I've personally seen changes to 72t rules, creation of the ACA, and other tweaks to things during my saving years. I'd imagine we'll see more changes during your savings years so I would just keep paying attention to changes and thinking about strategies without deciding that you have it figured out until you're much closer to your retirement date.

This is an excellent discussion. I am 45 and in the same boat. I also just realized that I have reached Coast FI, and most of my funds are in roth retirement accounts that I don’t plan to access until age 59.5. So my current plan is to work 4-5 more years, which means I would retire 10 years before age 59.5.

So my current plan is to pay off the mortgage in the next 1-2 years. Until I retire in 4-5 years, I would also focus on contributing to a taxable brokerage account, and possibly a 457 account because I may be accepting a new job that offers that. Yes, I do understand that I can withdraw my roth contributions at anytime, but I prefer not to.

For that 10-year retirement period before age 59.5, I will likely use primarily the taxable brokerage account. I also like to have a purpose in life, so I may work 1 day a week (barrista fire) rather than only volunteer work. If things become tight, I understand some of my backup options: Roth contributions, possible 457b account, and my slightly larger emergency fund. I don’t currently have a traditional account that would make 72t sepp worth it.

I’m open to your thoughts! Thanks in advance.

This is an excellent discussion. I am 45 and in the same boat. I also just realized that I have reached Coast FI, and most of my funds are in roth retirement accounts that I don’t plan to access until age 59.5. So my current plan is to work 4-5 more years, which means I would retire 10 years before age 59.5.

So my current plan is to pay off the mortgage in the next 1-2 years. Until I retire in 4-5 years, I would also focus on contributing to a taxable brokerage account, and possibly a 457 account because I may be accepting a new job that offers that. Yes, I do understand that I can withdraw my roth contributions at anytime, but I prefer not to.

For that 10-year retirement period before age 59.5, I will likely use primarily the taxable brokerage account. I also like to have a purpose in life, so I may work 1 day a week (barrista fire) rather than only volunteer work. If things become tight, I understand some of my backup options: Roth contributions, possible 457b account, and my slightly larger emergency fund. I don’t currently have a traditional account that would make 72t sepp worth it.

I’m open to your thoughts! Thanks in advance.

I am also planning on doing Roth conversions over the course of a decade to move my 401k and 457b money into Roth money… I think I will save a bunch on taxes this way. Possible since I can live fairly cheaply.

I'm planning out my strategy and meeting with a fiduciary to get some extra knowledge on the details.

I think it is 100% worth looking into doing Roth conversions. We are all very aware of the difference of a few basis points for expense ratios… lowering our taxes can have a huge impact also.

Your plan to bridge the years before age 59.5 with a taxable account and qualified Roth IRA distributions is a good plan. If you contribute to an HSA, that can serve as another source of tax-sheltered income. Though you likely won't need it because you're planning far ahead, know that retirement accounts are always accessible through a 72(t) arrangement.

RMDs tend to be a "problem" only for those who are very over-saved in tax-deferred accounts. If that's not you, RMDs don't need to drive your planning.

I highly recommend picking up the excellent tax planning book by @Cody Garrett, CFP® and Sean Mullaney. Again, since you're starting to think about this so early, you have plenty of time to dial in an optimal plan for your situation.

@Matt Lammer I am familiar with the FOO and have followed it well. I think a fiduciary fee only CFP/CFA will be worth it when the times comes.

@Roberto Sánchez Legacy planning will need to be considered. It is too far away to fret over it, but it is definitely a consideration.

The comment by @Matt Lammer is overall really good. (I can't seem to interact with it, that is to like it or to reply to it, which I think might be bug that Jonathan needs to address. So, I'll live my comment as a top-level reply.)

However, the only tweak I would make would be to factor in legacy planning to help guide whether you want to prioritize drawing from traditional pre-tax accounts before taxable brokerage.

For instance, if you plan to leave everything to a registered charity, church, religious entity, or such that is tax exempt, I wouldn't bother trying to prioritize getting out pre-tax assets before Roth. The reason is that whether you leave such an entity $1M in a Roth IRA or $1M in a Traditional IRA, the tax implications are entirely identical. However, if you leave your assets to children/grandchildren/other family/anyone who is required to pay taxes, then you might be able to get at traditional pre-tax investments very efficiently first, and leave Roth assets (which are already taxed and so don't incur a tax burden on the heir) and taxable assets (which receive an automatic step up in basis).

Don't worry at all about drawdown where you're at. Just focus on the best use of each next Saved/Invested Dollar, for the Accumulation Phase. That's

or

FOO - Your Ultimate Guide to Money Guy's Financial Order of Operations | Money Guy

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Early retirees know the money is easily accessed from anywhere. In your last year or 2 prior to retirement, you'll simply assess what assets you hold where, and extract them most efficiently.

How to Access Retirement Funds Early

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I've been retired over 5 years, since age 45. In general, drawdown goes: 1) surplus cash, 2) turn off reinvesting within taxable brokerage, 3) taxable brokerage, 4) SEPP from Traditional IRA (rolled over from 401k/etc), 5/Last) Roth IRA. As you're drawing down in retirement, your taxable income typically goes down and incremental Roth Conversions layer in to fill up targeted tax brackets/ rates. A fiduciary advice-only CFP can help you figure out how to optimize cash flow of retirement goals from your various accounts.