Where to save for 4% payout before 591/2

[Fourbigs]

Driving home from Playing with Fire, my husband and I realized most of our savings is in our retirement accounts.  Therefore, if we wanted to retire early, we would be penalized for taking money out before 591/2.  So, are most people saving a large portion in taxable savings accounts?  We currently save in our ROTH 401ks with pre-tax matches.  We also contribute towards our ROTH IRAs.  We recently became debt free.

[DadJokes]

https://www.madfientist.com/how-to-access-retirement-funds-early/

There are a few ways to access them early:

1) Be a government employee and get a 457b
2) Use a Roth conversion ladder (convert traditional funds to Roth, pay the taxes, then withdraw those funds 5+ years later)
3) Invest enough in Roths that you can live off of the contributions until 59.5
4) 72t withdrawals from tIRA
5) Use taxable account to bridge the gap

More importantly, welcome to the community!

[Fourbigs]

Thank you!  We would rather not tap the tax deferred accounts early.  It made me realize though that perhaps most people are saving just as much, if not more, in taxable accounts instead.

[kendallf]

Take a look at the investment order in this post:

https://forum.mrmoneymustache.com/investor-alley/investment-order/

The tax benefits of the 401k/IRA/HSA are substantial and in most cases you should max them out before investing in taxable accounts.  If you're saving large amounts of your salary you'll probably exceed these limits anyway, and then you can plunk the remainder into a taxable account.  Pick tax efficient vehicles (i.e., index funds that don't realize lots of transactions and capital gains, perhaps tax exempt bonds if your investment strategy calls for these) for the taxable account.

Note that you can tap your Roth contributions at any time without penalty anyway, as they were made after-tax.  Whether you should pick conventional or Roth is another matter.  It basically boils down to whether you think your tax rate now will be higher or lower than your tax rate in retirement.  If you're living on a small amount now and expect to do the same in retirement, you may want to bet on "lower in retirement" and contribute to a traditional (i.e. tax deferred) 401k/IRA. 

One more factor: if you are able to max out your 401k/IRA and contribute additional funds to a taxable account, contributing to a traditional account in effect gives you more money to stash in taxable accounts (due to the tax break now) and then you have both "buckets" to diversify your tax strategy later. 

See the Mad FIentist and GoCurryCracker blogs for lots more on these topics.

[honeybbq]

Thank you!  We would rather not tap the tax deferred accounts early.  It made me realize though that perhaps most people are saving just as much, if not more, in taxable accounts instead.

I save more in my taxable than in my retirement accounts. But I would always max the retirement accounts first.

[Ynari]

Thank you!  We would rather not tap the tax deferred accounts early.  It made me realize though that perhaps most people are saving just as much, if not more, in taxable accounts instead.

The madfientist post is gold. This chart appears, regarding this scenario (note, it's assuming she has 5 years of expenses covered through taxable accounts, as that is the length of time it takes to do a pipeline. I haven't looked into whether or not you can get around that, but I'd imagine a similar exercise would explain it.)

Assumptions
Imagine a 30-year-old woman who plans to retire when she turns 40.

Once she retires, she won’t need to access the money in her retirement accounts from age 40 to 45 but she’s going to need to withdraw $9,000 of her money per year from the age of 45 through to when she turns 60.

She’s in the 25% tax bracket during her remaining 10 working years and will drop down to the 15% marginal tax bracket when she retires.

She has $18,000 of pre-tax money to contribute to an account every year during her career.

Notice that in the scenario provided, taxable was the WORST option. Roth was better. Traditional and just paying the early withdrawal penalty was EVEN BETTER! Don't let the word "penalty" scare you away from something that is mathematically in your favor. The penalty is not a death sentence. Sure, withdrawal ladders and tax advantaged this-and-that-and-the-other-thing are great, but just paying the penalty... it isn't that bad.