It's the "pay income taxes on the amount converted" part that might look ugly. That $700,000 401k you built up over 20 years of contributing $15k/year has $300k in untaxed income. Correct me if I'm wrong, but that means you then have $300k in reportable income when you do the conversion that you must pay tax on, and of the $700k, only $300k can be withdrawn before age 59.5. To me, that looks like a nightmare. The IRS's page on Roth conversions only makes it look even less attractive. Help me out if you think I am looking at it the wrong way.
If you contributed $400,000 to a 401k account that now has $700,000 in it and you want to convert that entire 700k to a Roth IRA, you will pay taxes on the entire 700k, not just the 300k in earnings.
The key is to do the conversion in smaller annual chunks. A married filing jointly couple with two kids can pretty easily get to $60,000 of income without paying a single dollar in income taxes, thanks to deductions and exemptions and such. So in the first year after you retire you have zero income, and you convert $60,000 from your 401k to your Roth IRA. That $60k counts as taxable income, but since you've got $60k in exemptions and deductions you don't pay any taxes. You've never paid taxes on that $60k because you contributed it pre-tax to your 401k account and it grew tax free, and now it has come out tax-free and gone into a Roth IRA account where it will be tax free forever. Five years later, you can withdraw that entire $60,000 (but not any subsequent earnings from the past five years) from your Roth IRA tax free and penalty free.
So in year zero you have $700k in a 401k, and next year you have 60k in a Roth and 640k in your 401k. (I'm going to neglect subsequent returns here for the sake of clarity.)
In year two you convert another 60k, and now your Roth has 120k and your 401k is down to 580k. You've still never paid any taxes on any of it.
After five years of this process, your Roth IRA has 300k in it and your 401k is down to 400k. But in this year you can now withdraw the 60k from year 1 and spend it on anything you want. It becomes your income.
In subsequent years your transfer another $60k over from your 401k and you withdraw the 60k from five years ago tax free, so your Roth IRA stops getting bigger and just becomes a 5 year holding tank between your 401k and your checking account. You've effectively tapped your 401k well before retirement age, without paying an early withdrawal penalty, and without paying any taxes on it, ever.
This is the Roth IRA rollover pipeline. The amount you roll over every year might be 60k or 25k or 100k, depending on what you think your expenses will be five years later and how much tax you want to pay. The only hard part of this system is that for the first five years after you retire you do not get to use any of that $700,000 in your 401k, so you have to have some other source of income. That could be taxable investments, or it could be the principal you've already contributed to your Roth IRA while working (which you can also get out at any time without penalty or taxes). Or it could be from downsizing your house or something. Just any other source of non-sheltered money that will support you for five years until your Roth IRA rollover pipeline kicks in.
This information has been discussed to death on this forum but there are always new people showing up so maybe it's good to repeat it periodically. This Roth IRA rollover pipeline is the primary reason why a traditional 401k is almost always better for an early retiree than a Roth IRA.
More details from MMM:
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/