I've been reading over at the Mad Fientist about converting your 401k over to a Roth to avoid paying any taxes whatsoever, and it sounds awesome and like something I'd be well-placed to take advantage of in a few years.
I just checked and my effective tax rate for 2012 was 8.75%. We had some large medical expenses (had the money, did not go into debt) so that allowed us to itemize and got us a pretty nice refund (usually end up in the 15% rate and owing about $100-200). We had the same expenses for 2013, so will likely have a repeat for the taxes this year, but after that, it will be back to the low end of the 15% range until we retire.
It looks like we will not be taxed on any capital gains or dividends either as most of our holdings are in tax sheltered accounts, but I do have about $325K in a taxable account, and all of it is in the Spartan total stock market index fund (FSTVX) with low turnover. This is what we'll be tapping in the early days of retirement...
So basically, I could take a payout as income on the IRA, up to 11,000 (spread between both of our Roths) and still take somewhere in the neighborhood of $30-40K as dividend/cap gains out of the taxable to live on, do that every year, pay NO taxes since we'd be in the 15% effective tax rate, and the Roth money would be no tax when we get to the point of needing to withdraw as well? And there is no penalty for early withdrawal for shifting the traditional IRA money into the Roths?
Is there anything I'm missing on how this works? It almost seems too easy.