Dividing VTSAX's last 4 quarterly dividends by the stock price, I get a 1.9% divided. Call that 2%.
(0) this example 401(k) starts with 100k, and all withdrawn at the start
(1) First year it grows to 110k, and issues a 2% dividend of $2,200 (taxable)
(2) Second year it grows to 121k and another 2% dividend of $2,420, triggering more taxes.
(3) Third and final year growth to 133k and the last 2% dividend of $2,660 with more taxes owed.
On average, the stock grew by +33%. You can sell later lots, but it's roughly a +33% gain.
Selling $100k with a cost basis of about $75k means owing the tax on a $25k gain.
The $100k is then returned to a 401(k) plan with no growth over 3 years.
Taxes are owed on $25k + $7.3k = $32.3k.
In this example, $33k is extracted from a 401(k) and taxes are owed on $32.3k of gains.
That really depends a lot on your situation. In my situation, where I'm 42, retired in a state with no income taxes, spend $30k a year, MFJ status, but unfortunately most of my stash is in pre-tax retirement accounts, here is the tax ramifications (pretending inflation doesn't exist):
Do nothing:
(1) Eventually what is in my Brokerage runs out long before I'm 59.5.
(2) Start pulling the $30k out of pre-tax accounts.
(3) Tax: 10% of $30k early withdrawal penalty + 10% tax on amount above standard deduction = $3,520.
To cover the tax, I actually have to pull more out of investments, which are then taxed, etc, making it difficult to quickly calculate the exact amount of tax I'd end up paying, but suffice to say actual tax would end up being more than $3,520 / year.
Do what you said:
(0) this example 401(k) starts with 100k, and all withdrawn at the start
(1) First year it grows to 110k, and issues a 2% dividend of $2,200. I don't pay any tax on that, since it would fall under Standard Deduction with my not yet needing to pull from traditional accounts. $0 in tax
(2) Second year it grows to 121k and another 2% dividend of $2,420, triggering more taxes in theory, except those would all be qualified dividends, and those dividends would clearly be less than the $80,000 qualified dividend tax bracket of 0%, since I only have $30k expenses (and therefore income) per year. $0 in tax
(3) Third and final year growth to 133k and the last 2% dividend of $2,660 with once again $0 in tax
(4) Sell to put the money back with $25k gain. Again, $25k + the gains on the $30k/year I normally sell for expenses is still far below the $80k + SD which is taxed at 0%. And that's assuming I didn't take advantage of capital gains harvesting in the prior 2 years. $0 in tax
Result: $33k is in brokerage that would have been in the 401k, no taxes paid for the transfer. That $33k still continues to get gains on it's own as well, and will be taxed at a much more favorable rate (0%) compared to having that $33k of gains be in the 401k (10% early withdrawal penalty + taxed as normal income not LTCG).
I'd be surprised if any one claiming to follow the MMM frugality path would generate more than $80k + $24.8k of LTCG income in a single year just to cover their expenses. I mean, if you did this after doubling your investments, you'd be able to sell and spend $200k worth of stocks from a brokerage in a single year and still pay $0 in taxes, since only half of that would be gains and would fall under the 0% LTCG bracket! So, no one here that is already FIRE'd should ever need to pay taxes on stocks sold in a brokerage. But money pulled from a pre-tax retirement account is going to cost you 10% before 59.5, plus 10% or more on any amount > $24.8k you pull in a single year, which is way more restrictive. Even after 59.5, withdrawals from pre-tax accounts are still taxed as regular income, rather than the preferential treatment of long-term capital gains from stocks sold in a brokerage.
Therefore, stocks in a "taxable" brokerage is essentially tax-free post-early-retirement, and only stocks in a pre-tax retirement account (or gains in a Roth) is likely to cost you taxes when you sell them and spend the money. And, thus, the more stocks you can get to be in your brokerage instead of your 401k (without paying taxes on the transfer), the better.
A Roth Ladder can of course do the same thing (for as long as it remains legal), but it is much more limited since it is hard to not end up paying income tax on the Roth conversions themselves (they are taxed as regular income not as LTCG), and if you keep them small enough to not be taxed you may not be converting enough each year to keep up with future expenses, so you'll have to pay taxes on the 401k money one way or the other (either from the conversions themselves or from not converting enough and paying taxes on early withdrawals later). SEPP is also much more limited than some people make it out to be (I've looked into it, it would not let me pull out enough to live off of, plus it is a pretty permanent and restrictive change with respect to changing my mind and getting a job later).
So, yeah, I'm doing exactly with the first post said. But, my concern, reading the actual bill itself, is does it truly mean I won't have to pay any tax on the $100k until I put it back in 3 years? How does the IRS know at the end of year 1 that I intend to put it back later? Will I have to pay taxes then, and then get a refund later when I put it back? Or will I even get a refund after year 3 for the taxes I paid in year 1 and 2 on it? Or do I have to put a 3rd of it back each year to avoid taxes entirely? Or what if I say I will put it back and then change my mind later, do I pay back-taxes for the previous 2 years or does the "pay only 1/3rd of it per year" thing start at year 3 when I changed my mind about putting it back? I haven't been able to get straight answers about this yet, and worry I may not know until the actual tax forms are released around Feb or so of 2021...
Either way, given the market being low when I took it out, I'll get at least 1 year's worth of decent gains to be in the brokerage (assuming the market has decently recovered in a year) which, as explained above, is a great thing for my taxes and my ability to stay FIRE'd (I only just barely have enough as it is, so every little trick helps, since I didn't originally intend to FIRE but rather realized after health issues made it more difficult to get a job in my field that I had enough saved up that I could just live frugally and retire immediately). If it turns out that I'd have to pay taxes before year 3 after all, I can just put it back after 1 year and call it a small win.