General Questions: Do you agree with our current strategy? If we start saving more money (which I’m hoping we will now that we’re switching from Mint to YNAB), where should we put it?
I think your general strategy makes sense. Do whatever you need to do to get the maximum 403(b) match first. After that, the 457(b) plans are great because they're easy to withdraw from during early retirement without paying penalties or needing to go through any of the shenanigans like the Roth ladder or SEPP withdrawals. Once you're in the 15% bracket, putting a bit into Roth accounts to get some tax diversification isn't a terrible idea, but you may still want to prefer traditional IRAs if you expect your tax bracket to be lower than 15% during your retirement.
I read that one can convert Traditional IRAs to Roth IRAs in early retirement and pay no taxes. This seems to depend on living off of capital gains and dividends from a taxable account though. So this doesn’t apply to us, right?
Roth conversions and straight withdrawals from pre-tax retirement accounts both count as "regular income" and are taxed accordingly. To the extent that your regular income is less than your standard deduction ($12,600 for a married couple) plus your personal exemptions ($4,000 per family member), you do not need to pay tax on this income.
If it's just you and your spouse in your family at the time of your retirement, that means the first $20,600 of withdrawals/conversions are tax free. If you plan to retire with all of your savings in your retirement accounts, and you plan to spend more than $20,600 per year (in today's dollars), you will pay some tax on any excess. Depending on when you retire and how big your 457(b) balance is at that time, Roth conversions may not be necessary at all for you though.
I’ve always understood that Traditional IRAs and Roth IRAs are equivalent if you’re in the same tax bracket now and in retirement. I assume we’ll be in the same tax bracket in retirement, so I chose the Roth IRA just to diversify when we pay taxes. Then, I read that I need to compare my marginal tax rate today to my effective tax rate in retirement. Mind blown. If I go with all tax-deferred plans, then I’m eliminating all of my 25% burden and a good chunk of my 15% burden now… and I’m paying 0%, 10%, and some 15% in retirement. I don’t even know what my specific question is here. Someone please help!
No, don't worry about your effective rate in retirement. Compare marginal dollars now to marginal dollars later. Suppose you're currently on track to have 75% of your money in pre-tax retirement accounts and 25% in Roth accounts when you retire. To maximize your post-tax money, you'll probably want to withdraw 75% from pre-tax and 25% from Roth in a typical year to keep things in balance.
If you plan to withdraw $40k per year, that means you'll have $30k of gross income subject to tax, and $10k that is untaxed. As I said above, the first $20,600 of gross income is tax free. That leaves $9,400 of taxable income, which puts you right in the middle of the 10% tax bracket.
If you switched some of your Roth conversions to traditional and kept that up as long as you're working, you might put yourself on track to have 90% traditional and 10% Roth at the time of retirement. That decision would increase your taxable income during retirement because you have less Roth money to withdraw. This income would be taxed at your
marginal retirement rate (10%). The 15% bracket doesn't start until you're past $39k of gross income. Compare this rate to what you're paying now. Are you in the 15% bracket? Maybe decreasing your Roth contributions in favor of more traditional contributions would make sense.
Note that the effective tax rate doesn't come into play here. It's all marginal. If you change your saving behavior now, how will that change your withdrawal behavior later? Those dollars are taxed based on marginal rates at that income level.