OK so our plan has always been max out both 401K's and spill over the remaining investment dollars to taxable vanguard account. Then in 8 years when we are scheduled to FIRE, we start the Roth conversion ladder on the 401K's while using our taxable account dollars to live off of during the 5 year soak time.
Recently I've been questioning if we should add in a Roth as the secondary investment vehicle and max that out before we hit the taxable accounts. My concerns are -
1) If we withdraw the Roth funds before 59 1/2 (which we will) and we need to withdraw earnings along with principal, I understand the earnings will be considered a "non-qualified distribution" and will be taxed at ordinary income rates + 10%. Is this accurate? If so, then the taxable account would be preferable because earnings would only be taxed at the capital gains/dividends rate.
2) If the above statement about Roth earnings distributions is correct, how does this affect the conversion ladder? Say you convert money from an IRA to Roth and let it soak for 5 years before withdrawing, wouldn't the earnings still be a "non-qualified distribution" and taxed heavily because it's early? I guess I'm confused about how the conversion ladder gets around the non-qualified distribution penalty.
Thanks!